Fed’s Williams expects central bank to return to asset purchases soon
New York Fed President John Williams says recent volatility in repo markets shows that a modest level of Fed bond purchases will soon be needed to keep overnight lending markets supplied at appropriate levels.
New York Fed President John Williams said that the Federal Reserve could soon return to expanding its securities holdings, a week after the central bank said that it would wind down efforts to shrink its balance sheet on Dec. 1.
The net bond purchases would be the next, long-planned phase of the Fed’s approach to matching the levels of cash-like assets available to banks to their needs—not a new effort to stimulate the economy.
So far, the Fed’s efforts to rightsize its asset holdings have been going according to plan, Williams said, in a speech at a central-bank conference in Frankfurt delivered Friday morning local time. He added that recent volatility in repo markets shows that reserves—a highly liquid asset that banks trade among themselves—have been falling close to levels that match banks’ needs, a sign that a modest level of Fed bond purchases will soon be needed to keep overnight lending markets supplied at appropriate levels.
The bond purchases are part of a plan that Fed officials have previously telegraphed, and will “in no way represent a change in the underlying stance of monetary policy," Williams said, according to a published text of his remarks.
Williams pointed to a stretch of increased pressure in repo rates as a sign that the overnight lending markets at the heart of the financial system are no longer awash in much excess cash. The effective fed-funds rate—the interest rate targeted by the Fed—has risen relative to the Fed’s targeted range, although it has stayed within that range. Some repo-rate benchmarks have swung higher than the Fed’s target, however, suggesting borrowers have been willing to pay a premium for relatively scarce cash.
“Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves," Williams said, referring to the trigger for the Fed to resume net purchases.
In another sign of tighter funding conditions, more banks have turned to using the standing repo facility, a lending option offered by the Fed that permits collateralized overnight borrowing at a rate equal to the top end of the Fed’s target interest-rate range. The stretch since mid-October has seen the most active use of the SRF since it was introduced in 2021, including two days last week when borrowers accessed more than $10 billion.
The aim of the SRF is to place a soft cap on repo rates by offering a large volume of cash lending at the highest rate the Fed intends to permit. Market repo rates have at times slightly exceeded that cap in recent weeks, but Williams said that the facility is still serving its purpose.
“The SRF has been effective as reserves have moved from abundant toward ample," Williams said. “I fully expect that the SRF will continue to be actively used in this way and contain upward pressures on money market rates."
Write to Matt Grossman at matt.grossman@wsj.com
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