Quiet meeting, loud signal

The New York Federal Reserve has held private talks with major Wall Street banks about its standing repo facility (SRF) as pockets of stress reappear in dollar funding markets. According to a report in the Financial Times, the meetings took place on the sidelines of the Fed’s annual Treasury market conference and focused on why banks are still reluctant to rely on the tool, even as short term rates show signs of strain.

The SRF was launched in 2021 to act as a permanent safety valve for the financial system. It allows eligible institutions to swap Treasuries and agency securities for overnight cash at a pre set rate, helping cap sudden spikes in money market rates and reducing the risk of a repeat of the 2019 repo shock. For most of its life the facility sat idle. That changed in late October, when usage briefly jumped as dealers tapped it for tens of billions of dollars.

Why the Fed is puzzled

What worries policymakers is that, despite this spike, many firms still chose to borrow in the open market at higher rates instead of using the Fed’s cheaper backstop. Roberto Perli, who oversees the central bank’s open market operations, said recently that institutions should feel comfortable drawing on the SRF “even in large volumes” when they need liquidity.

Behind the scenes, officials fear that stigma and internal risk rules are still discouraging banks from accessing the facility, undermining its purpose as an automatic shock absorber. If lenders hesitate to use a tool designed specifically for periods of stress, then funding markets can seize up faster than the Fed expects, forcing it to improvise emergency measures later.

What it means for markets and FX

For traders, the debate is another reminder that the Fed’s easing cycle does not automatically guarantee smooth sailing in dollar funding. The policy rate may be lower than a year ago, but balance sheet runoff, higher Treasury issuance and tighter regulations all pull in the opposite direction, draining spare cash from the system.

In the near term, any hint that dealers are leaning more heavily on the SRF could calm volatility in repo and bill yields and take some pressure off the front end of the Treasury curve. A well used facility would signal that banks view the backstop as a normal part of the plumbing rather than a last resort.

For FX markets, persistent funding tightness tends to support the dollar against lower yielding peers and puts a floor under cross currency basis swaps. If, however, the Fed convinces banks to treat the SRF as a true safety net and liquidity conditions stabilise, the dollar’s latest safe haven bid could fade, leaving currency moves driven more by growth and rate expectations than by sudden money market scares.