Barclays strategist Joseph Abate suggests that the Federal Reserve might lower the overnight reverse repurchase agreement (RRP) rate in its December meeting. However, due to ongoing balance sheet constraints, secured financing rates are expected to remain above the new level.
The minutes from the Fed's November meeting indicate that some policymakers see value in a "technical adjustment" to the RRP offering rate, aligning it with the lower end of the federal funds rate target range. Currently, the overnight RRP rate stands at 4.55%, which is 5 basis points higher than the lower boundary of the Fed's target range of 4.5%-4.75%.
Abate notes that the rationale for reducing the rate is purely technical, aiming to restore it to pre-pandemic levels where it matched the lower end of the federal funds rate target range. The Fed is expected to maintain the Interest on Reserve Balances (IORB) at 4.65%, widening the spread between the two to 15 basis points.
Overall, a 5 basis point reduction in the RRP rate is anticipated to concurrently lower all repo rates. However, this adjustment is unlikely to alter market fundamentals, as balance sheets remain tight and the demand for asset financing continues to be robust.
