NY Fed’s Remache Says US Funding Market Volatility Is Normal

NY Fed's Julie Remache, deputy manager of the System Open Market Account, stated that money market volatility on key reporting dates is normal and not concerning, attributing it to increased Treasury bill issuance since July and the central bank's ongoing balance sheet reduction. These factors are drawing funds from the financial system and pressuring ultra short-term rates, which the Fed views as a natural part of balance sheet normalization.

Analysis

The New York Fed is signaling to markets that recent volatility in short-term funding rates is an expected and non-threatening consequence of current policy. According to Julie Remache, deputy manager of the System Open Market Account, the pressure on ultra short-term rates stems from a two-pronged reduction in system liquidity: the Treasury's increased issuance of short-term bills since July, which attracts cash away from other parts of the financial system, and the Federal Reserve's ongoing balance-sheet reduction (quantitative tightening). The Fed's characterization of this volatility as "normal," particularly around key reporting dates, suggests a high tolerance for these market fluctuations and indicates that officials are not currently concerned about systemic stress. This commentary serves to manage market expectations, reinforcing that the central bank views these rate movements as a natural feature of its policy normalization process rather than a sign of market dysfunction requiring intervention.

Key Decisions for Investors

• Investors should anticipate continued, manageable volatility in money markets and not overreact to rate spikes around key reporting dates, as the Fed views this as a normal part of its balance sheet normalization.
• Monitor the pace of both the Fed's balance sheet reduction and the Treasury's bill issuance schedule, as these two factors are the primary drivers of liquidity withdrawal and will influence short-term rate levels.
• For those managing cash or short-duration portfolios, the elevated Treasury bill issuance may present attractive yield opportunities, but it is critical to remain aware of the potential for intermittent rate fluctuations driven by these technical supply-and-demand factors.