New York Federal Reserve President John Williams has indicated that the US central bank may soon resume expanding its securities holdings to address emerging pressures in overnight lending markets.
Balance Sheet Normalization Nears Completion
Speaking at a central banking conference in Frankfurt on Friday, Williams revealed that the Federal Reserve's efforts to right-size its asset holdings are progressing as planned. The Fed had previously announced it would wind down its balance sheet reduction efforts starting December 1.
The upcoming net bond purchases represent the next phase in the Fed's long-planned strategy to align cash-like assets available to banks with their operational requirements. Williams emphasized that this move should not be interpreted as a new economic stimulus measure, but rather as a technical adjustment to maintain proper market functioning.
Repo Market Pressures Signal Changing Conditions
Williams pointed to recent volatility in repurchase agreement (repo) markets as evidence that bank reserves are approaching levels that match institutional needs. Repo markets facilitate overnight lending between financial institutions, serving as a critical component of the financial system's plumbing.
The effective federal funds rate has been rising relative to the Fed's target range, though it has remained within the established boundaries. More notably, some repo-rate benchmarks have swung above the Fed's target, indicating that borrowers are willing to pay premium rates for 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 stated, referring to the trigger point for resuming net purchases.
Standing Repo Facility Sees Increased Usage
Another indicator of tightening funding conditions has been the heightened activity in the Fed's Standing Repo Facility (SRF). This lending mechanism allows eligible institutions to borrow overnight cash by posting collateral at rates equal to the upper end of the Fed's target interest-rate range.
The period since mid-October has witnessed the most active SRF usage since its 2021 introduction, with two days last week seeing borrowing exceed $10 billion. Williams affirmed that the facility is serving its intended purpose of placing a soft ceiling on repo rates, despite occasional breaches in recent weeks.
"The SRF has been effective as reserves have moved from abundant toward ample," Williams noted. "I fully expect that the SRF will continue to be actively used in this way and contain upward pressures on money market rates."
The Fed official's comments provide crucial insight into the central bank's thinking as it navigates the final stages of balance sheet normalization following the unprecedented expansion during the pandemic era.
