“The FOMC Packed A Huge Surprise” – Fed Now Comfortable With “Slightly” Negative Rates
While markets were focused on headline hot takes from today’s FOMC statement, those reading between the lines and focusing on the market plumbing – such as Curvature Securities’ Scott Skyrm – found “a huge surprise”: an increase in the RRP counterparty limit from $30 billion to $80 billion per counterparty.
While at first look, it seems quite benign, Skyrm notes that “this implies the Fed is very comfortable with zero percent rates and maybe even negative rates.”
Let’s rewind a little:
This week, Repo GC averaged at .01% and few RRP counterparties showed up at the RRP window. Remember, RRP counterparties invest cash at the Fed in exchange for Treasury securities at a rate of 0.0%. If the cash investors can’t get collateral from the Repo market, they go to the Fed. Surprisingly, there was no RRP activity on Monday and today, and only $702 million on Tuesday. Rates are close to zero and the market isn’t even using the RRP window.
Here’s the implication. As Skyrm explains, “if the Fed wanted overnight rates higher, they would have raised the IOER and/or RRP. Instead, they raised the RRP counterparty limit meaning they are very comfortable with rates here at zero, but don’t want them to drop into the negatives“… although they now seem to be ok with rates dipping occasionally into the red as they have done recently in GC repo…
… and 1 month bills.
Wed, 03/17/2021 – 20:52