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Investors held a record amount of money at a one-night Federal Reserve facility on Thursday after the central bank began paying interest on the money to hold negative rates in some parts of the U.S. financial markets.
The change, which was announced after a meeting with monetary policy on Wednesday, responded to concerns money market funds and banks that have made an effort to find positive returns on investment.
Nearly 70 market participants parked $ 756 billion through the Fed’s reverse repurchase program data from the New York branch of the central bank.
That’s $ 172 billion more than last week on Wednesday, and $ 235 billion more than on Wednesday, when only 53 teams touched the facility.
Gennadiy Goldberg told TD Securities that “the sharp rise in usage shows how hungry investors are for profit.”
The Fed said the RRP rate was rising to 0.05% from zero to help “the proper functioning of short-term financing markets,” one of the two technical adjustments it made on Wednesday. Interest paid by banks on excess reserves deposited in the Fed rose from 0.1 percent to 0.15%.
As a result of the monetary and fiscal boost from the U.S. economy, money is being poured into money market funds that invest in short-term government securities. Rising demand for these securities has pushed rates below zero this year and threatened the viability of the $ 4 trillion industry.
Investors in the Treasury and other high-quality guarantees are negative for exchanging money in the repo market (which is also another key source of money in the money market).
Those rates helped by Wednesday’s adjustments were very low. The federal funds rate, the main policy used by the Fed, also rose to 0.08 per cent, closer to the central bank’s target of between 0 per cent and 0.25 per cent, down from 0.04 per cent earlier this year.
Jay Powell, President of the Faith, indicate at the post-meeting press conference there were few concerns about the increasing use of the RRP facility, indicating that it was functioning as intended.
“We believe that the reverse refund facility is doing what it needs to do, which is to provide a floor below money market rates and keep the federal funds rate within its range.”
Scott Skyrm, a repo trader at Curvature Securities, said the rate adjustments announced Wednesday would help the margin, but it is likely that RRP orders will continue to rise. The Fed’s commitment to buy a $ 120 billion monthly debt to stimulate the economy continues to widen the imbalance between money seeking housing and viable purchase values.
John Canavan, an analyst at Oxford Economics, said Thursday saw an unexpected increase in the use of RRP.
“This is unlikely to be the end of growth, and there’s a good chance the frontend’s flood of money will push RRP demand to more than $ 1 tn sometime.”
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