As the Federal Reserve continues to wind down its balance sheet and navigate a changing interest rate landscape, the central bank’s standing overnight lending tool—the Standing Repo Facility—is poised to play a bigger role in stabilizing short-term borrowing costs, a top New York Fed official said Monday.
Roberto Perli, the manager of the System Open Market Account (SOMA) at the Federal Reserve Bank of New York, told an audience at a fixed-income conference in Manhattan that the Standing Repo Facility (SRF) will likely take on greater prominence as a backstop for overnight funding markets as excess reserves in the banking system continue to decline.
“As the Fed’s balance sheet normalizes, and reserves become less abundant, we expect the Standing Repo Facility to be increasingly important in maintaining control over short-term interest rates,” Perli said. “It provides a ceiling on overnight borrowing costs and supports the effective transmission of monetary policy.”
A Quiet Corner of Monetary Policy Grows Louder
The Standing Repo Facility, launched in July 2021, allows eligible counterparties—primarily large banks and primary dealers—to borrow overnight cash from the Fed in exchange for high-quality collateral, such as Treasurys, agency debt, and agency mortgage-backed securities. The facility effectively acts as a cap on overnight interest rates by offering liquidity at a fixed rate—currently set at 5.5%, the upper bound of the federal funds target range.
Though underutilized for much of its existence, the SRF is now expected to play a critical role as the Fed continues reducing its holdings of Treasurys and agency MBS, a process known as quantitative tightening (QT). The Fed’s balance sheet has declined to just under $7.4 trillion, down from a peak of nearly $9 trillion in 2022.
As QT progresses, bank reserves are gradually declining, increasing the risk of stress in overnight funding markets—a risk the SRF is designed to mitigate.
“The SRF helps avoid spikes in repo rates that could spill over into broader funding markets,” Perli explained. “It’s not just a tool of last resort—it’s a structural part of the post-pandemic monetary policy framework.”
Fed officials are keen to avoid a repeat of the September 2019 repo market turmoil, when a sudden shortage of bank reserves caused overnight lending rates to spike above 10%. That episode, which occurred before the pandemic-era balance sheet expansion, prompted the Fed to eventually launch the SRF as a standing facility.
Perli emphasized that the Fed is aiming for a “minimally ample” reserve regime—enough reserves to support smooth market functioning without flooding the system. In such an environment, the SRF would serve as a safety valve, absorbing fluctuations in liquidity demand.
Wall Street analysts see the Fed’s messaging as a clear signal that short-term repo markets will become a key battleground in monetary policy implementation.
“The SRF is no longer just a theoretical backstop—it’s becoming a live tool in rate control,” said Priya Misra, head of global rates strategy at TD Securities. “As QT reduces excess liquidity, we’re going to see more frequent use of this facility, especially in periods of tax payments, bill issuance, or market stress.”
In recent months, repo market participants have seen growing usage of the reverse repo (RRP) facility decline, while demand for SRF remains near zero—but that dynamic could change quickly if reserves fall too far.
“The Fed is trying to thread a needle,” said Joseph Abate, repo market expert at Barclays. “They want to shrink the balance sheet without triggering another funding squeeze. The SRF is their insurance policy.”
Perli also noted that an active SRF helps the Fed maintain the integrity of its interest rate corridor, ensuring that market rates do not drift too far from the policy rate. With the federal funds target range currently at 5.25%–5.50%, the SRF ensures that no institution pays more than the upper bound for overnight funds.
Moreover, the SRF could take on additional importance if future geopolitical shocks, debt issuance surges, or year-end liquidity pressures push up repo rates.
“This facility helps the Fed maintain monetary control without needing to keep reserves excessively high,” said Julia Coronado, president of MacroPolicy Perspectives. “It’s part of a more flexible, responsive monetary toolkit.”
Fed officials are widely expected to slow the pace of QT later this year, especially as money market funds shift from the Fed’s reverse repo facility into higher-yielding T-bills. Perli declined to speculate on when QT might end but reiterated that money market stability remains a core priority.
The next major test for the SRF could come during the mid-June tax payment period, when Treasury cash balances surge and drain reserves from the system.
For now, the SRF’s mere presence is helping anchor market confidence—but as the Fed walks a tightrope between inflation control and liquidity management, that backstop could soon become a front-line tool.
Key Facts:
- Standing Repo Facility Rate: 5.5% (as of May 2025)
- Fed Balance Sheet Size: $7.4 trillion (down from $9 trillion in 2022)
- Launch Date of SRF: July 2021
- Usage: Currently near zero, but expected to increase as reserves decline
- Eligible Collateral: Treasurys, agency debt, agency MBS
- Fed Funds Target Range: 5.25%–5.50%
