US Fed seen the launch repo facility in early 2020: Deutsche Bank
(Reuters) – The Federal Reserve can launch a policy tool to lend to banks using government bonds and other securities as collateral in early 2020 with possible testing to begin later this year, a strategic director at Deutsche Bank said.
FILE PHOTO: Federal Reserve Board Building on Constitution Avenue is depicted in Washington, USA, March 19, 2019. REUTERS / Leah Millis / File Photo
Such a fixed-rate repurchase agreement or repo facility will serve as a backstop to the sharp peaks in interest rates in money markets, which occur with increasing frequency in the month and quarter.
"We affirm our expectations that the Fed could test this facility later this year and launch it for full-scale operations in early 2020," said Deutsche Bank strategist Steven Zeng in a survey published late on Friday.
Fed makers discussed the value of a repo facility in June. There is no consensus yet on the design of the facility.
Other Wall Street analysts asked if repo facilities are needed when the central bank can end the balance sheet normalization and resume treasury purchases before it is scheduled.
Nevertheless, the Fed and financial markets are benefiting from a repo, said Zeng.
For the Fed, such a program may shrink more of its balance, currently at $ 3.86 trillion, and may discourage large banks from obtaining reserves, resulting in a more even distribution of reserves to smaller banks, he said.
For traders and investors, a repository can support the financial market's liquidity and liquidity by offering more flexibility for banks to move between holding reserves and holding securities, he said.
Large US banks have clung to a large share of surplus reserves, rather than borrowing them, partly to meet the liquidity requirements introduced in response to the global financial crisis a decade ago.
More bank demand for Treasuries can help reduce bond traders' holdings of them. Dealer needs for funding to keep their Treasuries holdings have contributed to the intermittent peaks of open market repositories, he said.
The Fed can basically set the fixed interest rate of the facility at 35 basis points above the Fed's interest rate on bank reserves. The spread could be adjusted up or down, Zeng said.
He reckoned the Fed would allow banks and primary dealers, or the top 24 Wall Street Bonds dealers directly with the Fed, to access the repo.
Reporting by Richard Leong; Editing by Nick Zieminski
