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Fed’s Balance Sheet Runoff Strains Repo Market, Sparks Liquidity Concerns
Fed’s Balance Sheet Runoff Strains Repo Market, Sparks Liquidity Concerns
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The Federal Reserve’s ongoing balance sheet reduction is tightening liquidity conditions in the repo market, according to Roberto Perli of the New York Fed. As reserves decline from ’abundant’ to ’ample,’ overnight funding costs are rising, signaling potential stress in short-term interest rate markets.
The Standing Repo Facility is expected to play a more active role in monetary policy implementation as the Fed continues its quantitative tightening program. Market participants are closely monitoring the impact on financial conditions amid the central bank’s efforts to normalize its $8.9 trillion portfolio.
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