Perli from NY Fed See early signs of pressure in money markets

(Bloomberg) – The manager of the Federal Reserve’s massive portfolio said the central bank’s effort to reduce the size of its balance sheet begins to put pressure on the buy -off agreements market. This pressure probably means that the Fed’s tools to control short-term interest rates will become increasingly important, Roberto Perli, manager of System Open Market account at the New York Fed, said in prepared remarks Thursday. As the size of the Fed’s balance sheet is still declining and banking reserves are moving to adequate levels, upward pressure on the money market rates is likely to rise, Perli said during an event offered by the New York Fed and Columbia University’s School of International and Public Affairs (Sipa). The move in money market rates “represents a normalization of the liquidity conditions and is not a concern,” he said. “However, this implies that the SRF is likely to be more important to course control in the future than in the recent past,” he added with reference to the Fed’s standing repo facility. The Fed has shrunk its debt to debt since June 2022. Last month, policymakers delayed the pace of the run -off by reducing the cap on the amount of treasuries allowed each month without being reinvested to $ 5 billion from $ 25 billion. The cap on securities with a mortgage loan was left unchanged at $ 35 billion. Fed officials and investors are watching the amount of cash that banks park at the central bank to determine when it has to stop its balance sheet, a process known as quantitative rise or QT. If the amount on hand rises, it indicates that there is more liquidity in the system, which allows the Fed to continue longer. The Fed’s balances are $ 3.24 trillion in the week to May 14, from $ 3 trillion the previous week, according to the latest Fed data. It is just below the level where the central bank started QT almost three years ago. Wall Street – Streets estimate that the Fed should hold the balances of more than $ 3 trillion to $ 3.25 trillion to maintain adequate liquidity – and prevent tension. Standing Repo facility Perli has acknowledged that the SRF – which enables the coming banks and primary traders to borrow funds overnight in exchange for treasury and agency debt at a rate set by the Fed – can help reduce the amount of reserves a central bank must “work in a generous reserve. “The more frictionless the facility is, the more efficient it will be, and the lower the reserve buffer needed to account for the uncertainty inherent in the implementation of monetary policy,” Perli said. Earlier this month, Perli said the New York Fed plans to set up early for the SRF part of the usual schedule in an effort to support the market functioning. The institution has begun to offer extra daily repo operations, even before last month’s effect market. The extra operations were offered at the end of December and end of March, periods when rates on repurchase agreements tend to rise as banks outline their activity to increase balance sheets for regulatory purposes. Perli noted that although the SRF is an ‘important facility’, there are problems that prevent counterparties from using it. Officials are looking for ways to address this counter -wind, he said. This includes the inability for merchants to just only just on their balance sheets, and the uncertainty of allocation allocations. “This friction contributes to the costs that counterparties face when using the facility, and means that counterparties generally need private market repair rates to trade substantially above the SRF minimum bid rate before using the facility,” he said and noticed that this friction was visible in December 2024. -with help from Maria Eloisa Capurro. More stories like these are available on Bloomberg.com © 2025 Bloomberg LP