(Reuters) – The Federal Reserve could launch a policy tool to lend to banks using Treasuries and other securities as collateral in early 2020, and possible tests will begin later this year, a Deutsche Bank strategist said. .
FILE PHOTO: The Federal Reserve Board Building on Constitution Avenue is shown in Washington, USA. UU., March 19, 2019. REUTERS / Leah Millis / Stock Photo
This type of repurchase agreement, or repurchase, of a permanent fixed rate would serve as a backup against sudden spikes in interest rates in the money markets, which occur more frequently at the end of the month and quarter.
"We reaffirm our expectations that the Fed could test this facility later this year and launch it for large-scale operations in early 2020," Deutsche Bank strategist Steven Zeng wrote in a research note published on Friday.
Fed policy makers debated the merit of a repurchase facility in June. There is still no consensus on the design of the installation.
Other Wall Street analysts questioned whether a repurchase facility would occur sometime earlier when the central bank can complete its balance sheet normalization and restart its purchases of Treasuries sooner than planned.
"Our basic case remains that this facility will be implemented eventually, but we believe that it may take longer than we expected, around the third quarter of 2020, given the diverse opinions on the parameters of the participants," the rate strategist wrote. Citi Steve Kang's investigation into an investigation. Note.
However, the Federal Reserve and the financial markets will benefit from a return facility, said Zeng of Deutsche Bank.
For the Federal Reserve, such a program could reduce a larger part of its balance sheet, currently at $ 3.86 billion, and could discourage large banks from accumulating reserves, which would result in a more even distribution of reserves to the smaller banks, he said.
For traders and investors, a repurchase facility could support trading volumes and the liquidity of Treasuries by offering more flexibility to banks to move between holding reserves and securities, he said.
Large US banks have clung to a large part of the excess reserves, instead of lending them, in part to meet the liquidity requirements promulgated in response to the global financial crisis a decade ago.
A greater demand for Treasury bonds by banks could help reduce the holdings of bond traders. The operators' need to finance their inventory of Treasury bonds has contributed to intermittent spikes in open market buyback rates, he said.
The Fed can initially set the facility's fixed rate at 35 basis points above the interest the Fed pays on bank reserves. The spread could be adjusted up or down, said Zeng.
He considered that the Federal Reserve would allow banks and primary dealers, or the 24 leading Wall Street bond firms doing business directly with the Federal Reserve, to access the ease of repayment.
Richard Leong's report in New York; Edition by Nick Zieminski and Peter Cooney