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New York Federal Reserve president John Williams convened a meeting with Wall Street dealers this week over a key short-term lending facility, underscoring officials’ concerns about strains in US money markets.
The hastily arranged meeting, which has not been previously reported, took place on the sidelines of the Fed’s annual Treasury market conference on Wednesday, according to three people familiar with the matter.
It comes at a time when banks, investors and officials are concerned about signs of stress in an arcane, but vital corner of the US financial system.
Williams solicited feedback from primary dealers, mostly banks that underwrite the government’s debt, on the use of the Fed’s standing repo facility, which central bank officials describe as a crucial pressure relief valve to help them keep short-term borrowing costs within their target range.
A representative from many of the 25 primary dealers was in attendance, the people said. They noted that the attendants were broadly members of banks’ teams specialising in fixed-income markets.
A spokesperson for the New York Fed confirmed the meeting took place.
“President Williams convened the New York Fed’s primary trading counterparties [primary dealers] to continue engagement on the purpose of the standing repo facility as a tool of monetary policy implementation and to solicit feedback that ensures it remains effective for rate control,” the spokesperson said.
A closely tracked measure of short-term borrowing costs, known as tri-party repo, jumped well above a rate set by the Fed late last month, but then eased back the following week as investors took solace in the central bank’s pledge to stop shrinking its balance sheet on December 1.
Tri-party repo rates have again picked up this week, rising to almost 0.1 percentage points above the Fed’s rate on reserve balances — though they remain lower than at the end of October.
Roberto Perli, the head of the New York Fed’s market operations, acknowledged this week that some borrowers have struggled to secure repo rates close to the level of interest paid on reserves parked at the US central bank.
“The share of repo transactions taking place at rates above the [interest rate on reserve balances] has reached levels last seen in late 2018 and 2019,” Perli said earlier this week at a New York Fed event.
Repo transactions, in which high-quality collateral is exchanged for cash on a short-term basis, provide essential lubrication for the financial system, and rates on these transactions are closely watched by policymakers.
Analysts have warned that they expect further bouts of pressure in the coming weeks. After three years of quantitative tightening, banks have little excess cash, a condition that will only worsen as year-end approaches and they reduce the size of their balance sheets for reporting purposes.
Williams and other senior Fed officials have insisted that the SRF will be a crucial tool in relieving that pressure and capping short-term rates within the Fed’s target range.
The New York Fed president said earlier this week he viewed the recent use of the facility as “effective”, adding that he “fully” expected it would “continue to be actively used . . . and contain upward pressures on money market rates”.
But use of the facility has been limited in recent weeks. Some groups have borrowed from the Fed, but not in high enough numbers to fully stabilise repo rates.
Lenders are often loath to use the facility, fearing that it could signal to the market that their institutions are under pressure even though names of borrowers are only made public two years after they tap the facility.
“Repo is all about trust,” said Thomas Simons, chief US economist at Jefferies.
“If any borrower gets the reputation of being riskier, it creates this perverse incentive for all the lenders to pull back at once, even if it is not deserved . . . once you get the stink on you, it’s hard to recover,” he said.
This article has been amended to reflect that there were 25 primary dealers at the meeting convened by New York Federal Reserve president John Williams, not 24
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