Money market funds have been draining cash out of the Federal Reserve’s repo and reverse repo facility in favor of short-term T-bills, which the Treasury Department has been increasingly issuing to finance the growing deficit.
The repo facility, which is considered a measure of excess liquidity in the funding markets, has been drawn down to only $35 billion.
This was recently noted in the FOMC minutes for July, which cited the depletion of the overnight repo facility and other actions that were likely to bring about a sustained decline in the central bank’s reserves for the first time since the Fed’s portfolio runoff started in June 2022.
Those reserves are necessary for the smooth operation of the financial markets.
While some analysts suggest that the money markets are operating smoothly, others point to the loss of the repo facility as a cushion for monetary policy and to the decline in foreign demand for T-bills that could make funding the deficit more difficult and more expensive.
Reliance on the front end of the Treasury curve opens the government to the risk of increased volatility, with short-term rates subject to inflation and changes in monetary policy.
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