MNI: Fed's Perli Seeing Early Signs Of Shift To Ample Reserves

The manager of the Federal Reserve's asset portfolio, Roberto Perli, said Thursday he is seeing "early signs" of a transition to ample bank reserves from abundant levels, with the timeline for QT now dependent in part on the efficiency of the Standing Repo Facility.

"It’s hard to estimate exactly what constitutes an ample level of reserves. We know that number is lower than the current USD3.2 trillion, since market indicators still point to reserves remaining abundant. But we also know it is substantially larger than the USD1.5 trillion level to which reserves dipped in September 2019, when they evidently became less than ample," he said in prepared remarks. 

Since 2019, the U.S. economy, bank assets and the size of money markets have all grown significantly, and New York Fed survey respondents say banks have increased their desired reserve levels and buffers materially, he said. "In addition, the Fed will need to maintain an operational buffer to account for uncertainty and ensure that the supply of reserves remains ample." 

As the size of the Fed balance sheet continues to decline, and as reserves transition from abundant to ample levels, upward pressure on money market rates is likely to increase, he said. 

NORMALIZATION

"We are starting to see the early signs of this in the repo market, especially around key reporting dates, following a period when the supply of reserves was so far in excess of demand that repo rates hardly moved at all," Perli said. The Fed announced in March that it would slow the pace of its balance sheet drawdown. (See: MNI: Fed's Standing Repo Facility Tested By Market Rate Spike)

"This represents a normalization of liquidity conditions and is not a cause for concern; however, it does imply that, in the future, the SRF is likely to be more important for rate control than it has been in the recent past."

Perli noted New York Fed President John Williams's paper released Thursday showing that the presence of a backstop like the standing repo facility can help reduce the amount of reserves that a central bank needs to supply to operate efficiently in an ample reserves regime. "The more frictionless the facility is, the more effective it will be, and the lower the reserve buffer needed to account for the uncertainty that is inherent in monetary policy implementation," Perli said. 

The SRF is an important facility, but it is not frictionless, he said. He pointed to auctions that are carried out and settled in the afternoon, the inability to take advantage of balance sheet netting when borrowing from the SRF, and uncertainty of award allocations, which is related to the size limits of the facility. Perli said the Fed will start implementing daily morning SRF operations in the not-too distant future. 

"There is room to improve the effectiveness of the SRF — this is why we are continuously evaluating its design and parameters," he said.