Money market fund assets scaled yet another new peak in the week to November 15, data released late Thursday in the US showed.
The near $22 billion haul was the fourth consecutive weekly inflow and counted as an acceleration from the prior week, when money funds recouped the entirety of tax-related redemptions seen in mid-October.
After this week, total AUM now stands at $5.734 trillion.
Both government and prime funds saw inflows, with institutional and retail investors contributing evenly.
The discussion around money funds, bill issuance and RRP has shifted a bit now that the Fed’s likely done raising rates. MMFs will probably be more comfortable with maturity extension with the threat of additional rate increases receding, and that could mean RRP drain picks up.
According to TD, money fund WAM is now 33 days, up from 16 days at the beginning of the year. “Money funds are realizing that the Fed has stayed put for two straight meetings and low market pricing for December and January suggests they will continue to stay put, so the time to extend is nigh,” the bank’s Gennadiy Goldberg said.
RRP balances dropped to just $912 billion on Thursday, bringing the drain since the debt ceiling deal to $1.25 trillion.
Facility usage fell below $1 trillion on November 9 for the first time since August of 2021.
The conversation is turning to what happens once usage of the facility falls away entirely. Many argue the Fed will need to halt QT at that point. “The RRP facility represents ‘excess liquidity’ in the market,” Curvature’s Scott Skyrm remarked this week. “Once the facility is drained, there will no longer be any ‘excess liquidity.'”
Expect that debate to become more urgent (or at least more topical) in the months ahead.
Meanwhile, usage of the Fed’s liquidity backstops (the Bank Term Funding Program and the discount window) were essentially unchanged on the week at $112.942 billion and $2.241 billion, respectively.
Interested in your thoughts about the end of QT because the RRP is run down. I don’t understand the linkage. If I read the numbers right, the fed has about $4T “extra” on the balance sheet since the pandemic started. The current RRP data (again, if I read it right) is about $1T. Seems to me like there is plenty of “extra” stuff on the balance sheet beyond the RRP. That isn’t counting all the balance sheet growth before the pandemic. Why would QT stop?
Well, the definition of “abundant,” “ample” and “scarce” isn’t fixed. Nobody knows exactly where the reserve scarcity threshold is, and as we saw in September of 2019, it’s easy to step over that threshold accidentally to fairly dramatic effect. There’s a safeguard in place to prevent a re-run of that mini-crisis, but recent events (i.e., March’s drama) add another wrinkle and there’s no telling what market (let alone macro) conditions will look like when RRP fully drains. Some argue the situation could get uncomfortable when reserves fall below 10% of GDP which, measuring from current levels, suggests that if the Fed wants a little insurance against short-term funding stress, they should halt QT before RRP is fully drained. One way or another, it (QT) will almost surely stop by year-end 2024.
Here’s more: https://heisenbergreport.com/2023/11/20/heres-how-fed-balance-sheet-runoff-ends/
As always, it’s complicated… When I look at the fed balance sheet vs GDP, it was about 5% for a long time until the GFC. Why would it need to be structurally higher now? I’m not well enough versed in this stuff to really understand the relationship between the balance sheet and reserves, so I’m not sure that reserves of 10% isn’t close to the historical levels.
Thanks for your response
I guess the “right level” of bank reserves will be a concern in 2024. Per some views, bank reserves are already nearly there.
https://research.stlouisfed.org/publications/economic-synopses/2023/08/23/the-mechanics-of-fed-balance-sheet-normalization