A 'tsunami' of cash is driving rates ever lower. What will the Fed do?
New York (Jun 3) Banks have too much cash on their hands - and they're running out of places to put it.
Nowhere is this more evident than in the rising popularity of a Federal Reserve program that lets firms stash their cash overnight with the U.S. central bank in exchange for at best a small return. The payout these days: Zero percent.
But usage is soaring to record highs as money market funds and other eligible firms cope with what some analysts are calling a "tsunami" of cash.
The banking system is swimming in nearly $4 trillion of reserves, thanks in part to the Fed's asset purchases, a fall off in Treasury bill issuance and a rapid drawdown in the government's store of funds at the Fed. The Treasury General Account, or TGA, has dropped by nearly $1 trillion since last fall, mirrored by the surge in bank reserves.
All that cash is pushing down short-term rates and increasing expectations the Fed will need to respond with a technical adjustment at its June 15-16 meeting, if not earlier, in order to keep its key policy rate from sliding further.
The situation is also a headache for money market funds, which are absorbing much of the money and finding fewer options for investing it, a dynamic the Fed is watching closely.
"They're getting cash in the door and aren't able to find good places to invest it," said Gennadiy Goldberg, a senior U.S. rates strategist for TD Securities.
TIME TO ACT?
Fed policymakers were briefed by staff on money market issues at their last meeting in April. A senior official from the New York Fed advised them they may want to consider making a minor technical adjustment to rates "in the coming months" if the downward pressure on overnight rates continued.
The effective federal funds rate - the central bank's critical policy rate - slipped as low as 0.05% at the end of May before rising back to 0.06%. It is hovering near the bottom of the Fed's target range of zero to 0.25%. The lowest it has ever settled on a daily basis is 0.04%.
The central bank's options for responding include lifting the interest it pays on excess reserves, or IOER, which is currently at 0.10% and is available only to banks. It could also lift the rate on the facility soaking up much of the extra cash: reverse repurchase agreements, or reverse repos, which are open to non-banks such as money-market funds.
Together, the two are designed to form the "corridor" for the fed funds rate. The reverse repo rate - currently at zero - sets the floor by giving firms a risk-free place to park some of their cash overnight. Usage soared to a record $485.3 billion last week, up from nearly nothing in March.
Reuters
