Over the past several weeks, the RRP situation, and the discussion around “what to do” about it, has taken on a new sense of urgency.

Fed officials and some short-end strategists would probably tell you that’s a poorly-worded sentence. There’s no “situation,” they might say, and even if there is, there isn’t anything “urgent” about it.

My own view is that, at the least, the Fed needs to do a better job of acknowledging why some market participants think this is an issue. Monetary technocrats have a long history of suggesting that various facilities and policies are working “as intended” right up until such assurances become wholly untenable. That’s a suboptimal communications strategy that conjures unflattering comparisons to politicians claiming things are going well when they aren’t.

Of course, acknowledging the issue doesn’t necessarily mean the Fed should, or even can, do anything to address any problems that do in fact exist.

Money market fund assets rose by another $49 billion over the latest weekly reporting period, and as discussed on innumerable occasions here of late, a lot of the inflows end up parked in the RRP facility, which is $2.4 trillion worth of swollen. That’s “lost liquidity for the banking system,” as JPMorgan’s Nikolaos Panigirtzoglou put it this week, on the way to briefly walking through the pitfalls of trying to ameliorate the situation.

I’ll spare readers the “deep” specifics in the interest of driving home the broader point about unintended consequences.

“In principle, if the Fed becomes less comfortable with the level of ON RRP balances and the resulting withdrawal of liquidity from the banking system, it could take steps such as starting to pare back some of the easing in counterparty restrictions to bring down these balances [but] this could distort the front-end of the curve if, for example, this forces government money market funds to move to T-bills at a scale that would push yields deeply lower,” Panigirtzoglou wrote. Depending on who the seller is, that could lead to a chain reaction.

If, for example, sellers replace T-bills with short-dated government bonds or relatively riskier assets like commercial paper, the effect could be to drive down short-term yields, displace investors at the front-end of the yield curve and reduce borrowing costs for non-government issuers. That might be tantamount to a rate cut.

It’s also possible that government or non-government issuers may “try to arbitrage the much lower borrowing costs for short-term borrowing by shifting their issuance from longer-term debt to short-term debt, reduc[ing] the supply of duration, which would be equivalent to a form of QE,” as Panigirtzoglou went on to say.

Again, the unintended consequences could be myriad and potentially vexing. At the end of the day, the only “clean” way for the deposits-to-MMFs-into-RRP dynamic to reverse is for banks that want deposits to compete harder for them, ideally while preserving margins through tighter lending standards and slower credit creation to Main Street such that inflation cools.

As the figure on the left above shows, there’s a long way to go for term deposits to catch up, let alone savings accounts.

While the Fed may argue this is a good thing given the assumed read-through for inflation of tighter lending standards from banks seeking to preserve margins after raising deposit rates, the concern is that passing along a higher cost of capital is easier said than done.

“The shift in deposits to MMFs is unlikely to stop for as long as the MMF yield-bank deposit rate gap remains wide,” Panigirtzoglou remarked, before gently suggesting that it “may be less straightforward for banks to narrow this gap by increasing deposit rates” given that raising deposit rates by 150bps could effectively wipe out margins assuming banks earn 4.5% on legacy assets.

Related: $5 Trillion Money Market ‘Bubble’ Spotlights Fed’s $2 Trillion RRP Garage