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The New York Federal Reserve reported that eligible firms deposited the largest amount of cash in its reverse repo facility since late June. This surge in inflows, totaling $465.6 billion, is likely connected to the end of the third quarter. Typically, quarter-end dates see increased inflows that taper off quickly, as anticipated by analysts and market participants.

The Fed’s reverse repo facility, which mainly attracts cash from money market funds, acts as a benchmark for short-term rates. The facility’s usage has been decreasing as the Fed scales back pandemic-era stimulus by letting its Treasury and mortgage securities mature without replacement, shrinking its balance sheet from around $9 trillion in the summer of 2022 to approximately $7.1 trillion today.

After reaching a peak of over $2.6 trillion at the end of 2022, the trajectory of the reverse repo facility has been on a path of sporadic contraction. The key question is whether the tool will eventually see negligible usage, as some Fed officials anticipate. Market participants speculate that certain firms may choose to hold cash with the Fed rather than investing in the private market for various reasons.

The Fed’s overarching goal is to reduce liquidity sufficiently to manage its benchmark overnight interest rate while allowing for normal money market fluctuations. Despite policymakers believing there is still progress to be made in reducing bond holdings, the exact point at which liquidity will be effectively managed remains uncertain. Roberto Perli, head of monetary policy implementation at the New York Fed, expressed confidence in further reduction of Fed holdings given the ample liquidity still evident in markets.

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