Bloomberg writes, "Fed's Limited-Time Offer in Money Markets May Be Hard to Cut Off." The article says, "The Federal Reserve is about to take an unprecedented plunge into money markets. It plans to make it a limited-time offer, but the assets are so attractive that it may be forced to extend the life of the deal. As soon as this year, Fed policy makers will greatly expand a $100 billion-dollar market for overnight loans known as reverse-repurchase agreements. They are designed to suck money out of the financial system so the Fed can raise short-term interest rates. They will also provide money-market funds and banks with safe investments that are now in short supply as financial-market reforms have heightened their need to hold exactly such assets. The U.S. central bank's potentially gigantic footprint in money markets poses risks. Establishing a long-term presence could crowd out private borrowers who use the markets for everything from financing inventories to managing seasonal flows of cash. Fed officials are trying to convince investors that eventually they want to stop using reverse repos. Their arguments don't seem credible to many, including economists who once worked there. "It is very fair to say this is going to be a permanent feature of the financial landscape whether they like it or not," said Roberto Perli, a partner at Cornerstone Macro LLC." Bloomberg continues, "The Fed's intended retreat from the program is "going to be a challenge, but I take the Fed at its word," said Steven Meier, head of cash, currency and fixed income at Boston-based State Street's money management unit. "It's not their intention to be the dominant player in the market." The piece adds, "Demand for the facility "could conceivably be much greater than what we have seen" in recent tests "as regulatory and structural changes in money markets boost demand for safe assets," according to Simon Potter, head of open-market operations for the FOMC and executive vice president at the New York Fed.... Contributing to that demand, regulators now require money-market funds to have 10 percent of their assets in cash, Treasury securities or other securities that can convert to cash in one day.... What's more, starting next year, so-called prime funds that invest in corporate debt for institutional shareholders must convert to floating share prices instead of the once dependable $1 per share. That change could also create new demand for stable net-asset-value products that invest solely in government debt." In other RRP news, the NY Fed announcing this week that it was expanding its Reverse Repo Counterparties List to include Federal Home Loan Bank of Pittsburgh and The Money Market Portfolio managed by Franklin Advisors.

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