(Bloomberg) -- While the Federal Reserve has begun talking about the prospects for a new tool to help control interest rates, Wall Street is divided about just how quickly it could be introduced if the central bank chooses to go down that path.
There was a discussion at the last Federal Open Market Committee meeting on the possible role in monetary policy implementation of a standing repurchase agreement facility, a tool that would allow eligible banks to convert Treasuries into reserves on demand at an administered rate. Such a facility could be aimed at exerting firmer control over short-end interest rates, which have sometimes shown a tendency to drift toward the upper end of the central bank’s target range.
Minutes of the June 18-19 FOMC meeting showed that Fed staff briefed officials about the idea of a standing repo facility, or SRF, but no decisions were reached and participants at the gathering said more work would be needed to define its objectives and evaluate its potential net benefits.
Lacking a clear direction from officials, market watchers remain at odds about when such a facility might come about, and some such as NatWest Markets are still unconvinced of the need for it at all. Strategists at BMO Capital Markets and Curvature Securities think that an SRF could be operational before year-end and help alleviate potential funding-market dislocations, while JPMorgan (NYSE:JPM) Securities and Wrightson ICAP (LON:NXGN) doubt it will be in place before December. Barclays (LON:BARC) and Deutsche Bank (DE:DBKGn), meanwhile, suspect that even if the Fed were able to start operations before 2020, it may still not be able to keep a lid on repo rates.
What the Strategists Say
- Wrightson ICAP (Lou Crandall)
- The odds are good that the Fed will launch a repo facility at some point in the coming year, “but we are unsure whether it will be in place in time for the December 31 statement date”
- BMO (Daniel Krieter, Daniel Belton)
- Though the discussion in the FOMC minutes “sheds little light on the structure of the facility, the commitment to further discussion at the next meeting strengthens our conviction that such a facility will be implemented by year-end which should spell relief for repo”
- JPMorgan (Alex Roever, Teresa Ho, Ryan Lessing)
- Ultimately, the Fed will decide in favor of an SRF, “though it may take several months to agree on its structural features. For now, based on the number of unanswered questions, we suspect it is unlikely that this standing facility becomes operational before year-end”
- Curvature Securities (Scott Skyrm)
- If the Fed decides to implement an SRF, it may be announced at the Sept. 17-18 FOMC meeting and begin operating in October. He nonetheless believes it would be easier to bring back an older mechanism known as the System RP
- Citigroup (NYSE:C) (Steve Kang)
- While an SRF would be useful for the fourth quarter of this year, the Fed is more likely to implement it around the third quarter of 2020 given the “diverse opinions on the parameters from the participants”; Click here to read more
- Bank of America (NYSE:BAC) (Mark Cabana, Ralph Axel)
- Now that there’s an increased risk of the Fed “positively surprising” the market with an SRF, participants should tactically trade swap spreads. Increased discussion of a standing repo facility justifies spread wideners for the next couple of months because it suggests the Fed is exploring how to limit repo cheapening versus the interest on excess reserves rate and provide incentives for banks to hold more Treasuries; Click here to read more
- Deutsche Bank (Steven Zeng)
- Even if the Fed decides to introduce a standing repo facility, it may not be able to “fully cap” the month- and quarter-end spikes in the funding market; Click here to read more
- NatWest Markets (Blake Gwinn)
- “We are still lukewarm on the whole idea” of a Fed standing repo facility. “The likelihood that the Fed at least tests such a facility has grown marginally. This shift is not because we see a greater need for a facility, or because we have seen progress towards working out the many implementation issues”
- Barclays (Joseph Abate)
- The Fed is likely to create an SRF before the end of 2019 that will have limited objectives and be insufficient to counter secured-funding rate spikes that have become typical at year-ends; Click here to read more