Fed Reverse Repo Funds Reach All-Time High

$485.3 Billion 'Liquidity Overflow Signals to Tighten'

[Asia Economy Reporter Park Byung-hee] Although there is an abundance of money in the short-term funding market on Wall Street, there are few suitable investment opportunities, leading to a record high increase in short-term funds deposited with the central bank, the Federal Reserve (Fed). This is interpreted as another signal indicating that the Fed needs to consider withdrawing liquidity.

According to the New York Fed, funds deposited with the Fed through reverse repurchase agreements (reverse repos, RRP) by commercial banks and money market funds (MMFs) reached a record high of $485.3 billion (approximately 542.5654 trillion KRW) on the 27th (local time), reported major foreign media on the same day. This surpassed the previous record of $474.6 billion set on December 31, 2015. Reverse repos are a means for the Fed to absorb market liquidity by lending U.S. Treasury securities to banks and MMFs in exchange for cash. Conversely, when liquidity is abundant in the market, banks or MMFs use reverse repos to deposit funds with the Fed.

In mid-April, the amount of funds deposited via reverse repos was below $50 billion. However, with ongoing large-scale quantitative easing and growing expectations of U.S. economic recovery, the funds deposited with the Fed surged sharply.

The fundamental reason for the accumulation of reverse repo funds at the Fed is that the Fed is supplying massive liquidity through quantitative easing by purchasing $120 billion worth of bonds and mortgage-backed securities (MBS) every month. In this environment, as expectations for U.S. economic recovery grow, short-term bond yields?where banks and MMFs primarily invest their short-term funds?have fallen to negative levels. Foreign media explained that as investment targets for banks and MMFs become exhausted, funds accumulate in deposits with the Fed. It is also expected that the accumulation of funds at the Fed will further push down short-term interest rates, which have already fallen below 0%.

Scott Skyrm, Vice President of Coverage Securities, explained, "The reason funds are flowing to the Fed is either because there is too much money or insufficient collateral, which are two sides of the same coin." He said that the large accumulation of short-term funds at the Fed indicates market distortion and that the Fed needs to reduce the scale of quantitative easing.

This content was produced with the assistance of AI translation services.