Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Analysis: A 'tsunami' of cash is driving rates ever lower. What will the Fed do?

EconomyJun 03, 2021 06:10AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/File Photo

By Jonnelle Marte

(Reuters) - 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.

(Graphic: Rising in popularity - https://graphics.reuters.com/USA-FED/CASH/qmyvmzgwnpr/chart_eikon.jpg)

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.

(Graphics: A relief valve for excess cash - https://graphics.reuters.com/USA-FED/CASH/jznvnwbjopl/chart.png)

The increased popularity of reverse repo may be a sign that the Fed has "injected too much cash into the market," said Scott Skyrm, executive vice president in fixed income and repo at Curvature Securities. "It's going straight back to the Fed."

Policymakers expanded access to the facility this year by loosening the eligibility rules and raising the daily limit on operations to $80 billion per user from $30 billion.

But some analysts say the Fed may need to do more by boosting the rate from zero, perhaps by 2-3 basis points or its more typical move of 5 basis points. Any adjustments to reverse repo or IOER could happen at the June meeting or before, analysts say.

FUND SQUEEZE

Many banks, unwilling to accumulate any more deposits, are funneling some of the excess reserves into money market funds.

But with interest rates expected to stay low for the foreseeable future, money funds could struggle to find safe ways to invest that growing pile of cash to avoid losses for investors. While they can waive fees, fund providers still have overhead costs to cover.

"At some point these funds are going to be pressed for profitability too," said Steven Kelly, a research associate with the Program on Financial Stability at the Yale School of Management. Firms that "take money and invest it at zero percent return" may struggle to cover their expenses.

Some money funds might eventually have to close to new investors or lower payouts, he said.

The Fed could offer money funds some relief if it raises the rate it pays on reverse repo operations, Kelly said. But that wouldn't address the longer-term financial stability concerns surrounding the funds, which sometimes have to sell holdings during times of stress in order to meet redemption requests, he said.

The central bank and other regulators have singled out money market funds, which the Fed supported at the height of the pandemic and more than a decade earlier during the global financial crisis, as an area that is ripe for more reform.

"There’s a structural issue and we know this," Fed Chair Jerome Powell said during an interview with CBS in April. "It really is time to address it decisively."

Analysis: A 'tsunami' of cash is driving rates ever lower. What will the Fed do?
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email