The Federal Reserve Bank of New York today released the names of 32 more money market funds that have been approved to buy securities from the New York Fed, if and when the Federal Open Market Committee decides to start fighting inflation by selling its holdings and withdrawing money from circulation.
The Fed calls these transactions reverse repurchase agreements, where it sells securities for cash. These reverse repos would be conducted by the New York Fed’s repo desk through the tri-party repurchase market, where J. P. Morgan Chase and Bank of New York Mellon act as intermediaries.
Fifty-eight money market funds are now approved to buy securities from the Fed. They may then turn around and reuse the securities for repo loans of their own, in a process called rehypothecation, as long as all transactions are conducted through the tri-party market. The tri-party market is thought to represent about one-fourth of repo transactions in the U.S. The remaining three-fourths are bilateral transactions conducted privately between two parties.
If the Fed starts selling securities, that could stimulate the repurchase market, which is still 43 percent below its peak in March 2008, according to the activity of the biggest dealers. It could also drive down security values, according to today’s Wall Street Journal. Presumably, the Fed would exercise caution, to avoid triggering a run on repo and a repeat of the financial crisis. The Wall Street Journal story did not mention the repurchase market.
The Fed also does regular repo transactions, in which it buys securities for cash. It does these repo transactions with its Primary Dealers, 18 broker dealers approved to repo with the Fed, through the tri-party market.