US Fed discusses 'Reverse Repo rate cut'... Market volatility increases
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- The Federal Reserve (Fed) discussed a 0.05% point cut in the Reverse Repo rate at the Federal Open Market Committee (FOMC).
- Adjusting the rate close to the target rate is a measure to maintain stability in the short-term money market.
- Citigroup analysts predicted that such a rate discussion could boost market volatility.
- The article was summarized using an artificial intelligence-based language model.
- Due to the nature of the technology, key content in the text may be excluded or different from the facts.
The Federal Reserve (Fed) discussed a plan to cut the Reverse Repo rate by 0.05 percentage points at this month's monetary policy meeting.
According to the minutes of the Federal Open Market Committee (FOMC) released on the 26th (local time), some members stated that "if the Reverse Repo rate is cut by 0.05 percentage points, the rate will be aligned with the lower end of the target rate range," adding that "this measure could slightly reduce the downward pressure on short-term money market rates." The current Reverse Repo rate is 4.55%, which is 0.05 percentage points higher than the lower end of the target rate range of 4.5%.
The Reverse Repo is a financial transaction where the Fed borrows money from financial institutions to control short-term funds, providing government securities in return at a fixed rate. From the perspective of financial institutions, it is a way to safely lend money to the Fed and earn interest.
As the Fed continues its quantitative tightening for the second year, the funds invested in the Reverse Repo facility have decreased from a peak of $2.6 trillion at the end of 2022 to about $1.5 trillion currently. However, the pace of decline has been slowing recently.
Lorie Logan, President of the Federal Reserve Bank of Dallas, stated, "Even if the Reverse Repo balance does not decrease in a situation where the rate is close to the target rate, lowering the rate may be appropriate." This is to maintain stability in the short-term money market.
Citigroup analysts predicted that this discussion could lead to actual adjustments in the next month or January next year. If the Reverse Repo rate rises, financial institutions are more likely to turn funds into the market instead of depositing them with the Fed. This is soon linked to corporate loans, bond investments, etc., increasing market volatility.
Kenneth Goldberger, a strategist at TD Securities, analyzed that "the Fed is preparing to adjust the Reverse Repo rate if there is pressure on the short-term money market rate at the end of the month or year." However, he added, "The possibility of rapid changes is low when considering the recent decline in Reverse Repo balances." On this day, the amount of funds invested in the Reverse Repo facility by 51 institutions was recorded at $148.8 billion (approximately 207.7 trillion won), the lowest since the 5th.
Reporter Im Dae-yeon allopen@hankyung.com
