Demand for New York Federal’s reverse repo rate hikes

Financial firms loaded with reserves are parking more of their cash at the New York Federal Reserve’s reverse repo facility.

Firms stored $142 billion on Tuesday and $101 billion on Monday with the facility as the reverse repo facility allows the firms to temporarily park their cash with them in return for small returns. Reportedly, it has been the largest operation since last year.

As the demand for the facility increases, speculations also rose that the Fed may need to make some technical adjustments soon to avoid short-term rates falling too low.

In a research note on Wednesday, lead analyst for Oxford Economics, John Canavan wrote, “the problem of excess front end cash is only going worsen over the next few months.”

Due to Fed’s $120 billion monthly bond purchase, and surge in the government’s stockpile as it pays out pandemic relief payments, the short-term interest rates are falling low.

Fed’s options include, either adjusting its overnight reverse repo rate for non-banks which currently stands at 0% or raising the interest it pays banks.

The central bank has only made such technical adjustments when the effective federal funds rate is within 5 basis points of the top or bottom of the target range, which currently stands at 0-0.25%. the Feds funds have been steady at 0.07% since mid-February, except for a temporary fall to 0.06% during March-end.