Fed repo borrowing jumps as quarter-end pressure stirs money market

A key overnight liquidity facility operated by the US Federal Reserve saw a notable pickup in usage at the start of the week, highlighting renewed demand for short-term funding as markets approach a quarter-end period.

Data released by the New York Federal Reserve showed that the central bank lent $25.95 billion on Monday through its standing repo operations. This marked the third-highest level of utilisation since the facility was introduced in 2021 to provide rapid, collateral-backed funding to eligible financial institutions. The loans are secured against US Treasuries or mortgage-backed securities and are extended on an overnight basis.

The borrowing was conducted at an interest rate of 3.75%, which sits at the upper end of the Federal Reserve’s current policy rate target range of 3.50% to 3.75%. Elevated usage of the facility often reflects tighter conditions in private funding markets, where borrowing costs can temporarily rise above the rates offered by the central bank.

Money markets are prone to bouts of volatility around quarter-end, as banks and financial institutions adjust balance sheets and manage regulatory requirements. The latest usage level was last exceeded on December 1, when borrowing touched $26 billion, and remains well below the all-time high of $50.35 billion recorded on October 31.

The standing repo facility was created to act as a liquidity backstop, ensuring that short-term funding markets continue to function smoothly during periods of stress. By offering funding at a known rate against high-quality collateral, the Fed aims to prevent sudden spikes in market rates and reinforce the transmission of monetary policy.

Alongside the increase in repo borrowing, data showed a decline in the use of the Fed’s reverse repo facility, where financial institutions park excess cash with the central bank. On Monday, firms placed $10.55 billion in the reverse repo window, down sharply from $20.34 billion on Friday, suggesting a modest shift in liquidity conditions.

Together, the movements in the Fed’s repo and reverse repo facilities underscore the dynamic nature of short-term funding markets and the central bank’s role in smoothing liquidity as financial conditions evolve.

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