By Michael S. Derby 

The Federal Reserve Bank of New York added $81.4 billion in temporary liquidity to financial markets.

Monday's intervention came in two parts. One was via overnight repurchase agreements, or repos, that totaled $56.4 billion. The other came in a $25 billion 28-day repo aimed at providing liquidity over year's end.

The Fed took all securities offered in the overnight operation, but dealers offered $43 billion in securities for the longer-term operation, repeating a recent pattern in which dealers have sought more liquidity to navigate the end of the year than the central bank was willing to provide.

Fed repo interventions take in Treasury and mortgage securities from eligible banks in what is effectively a short-term loan of central-bank cash, collateralized by the securities.

The Fed's money-market operations are aimed at ensuring that the financial system has enough liquidity and that short-term borrowing rates are stable and consistent with Fed goals, with the central bank's federal-funds rate staying within the 1.5%-to-1.75% target range. The effective fed-funds rate stood at 1.55% Friday. The broad general collateral rate for repo trading stood at 1.52%, also for Friday.

The Fed is legally charged by Congress to keep inflation low and stable, and to promote maximum sustainable job growth. As it has for decades, the Fed seeks to accomplish these mandates by setting the level of short-term interest rates, which then determines a baseline for the overall cost of credit in the economy. In the postcrisis era, the Fed is operating with a system where banks hold substantial amounts of reserves, both for regulatory reasons and by their own choice. The current rate-control tool kit is designed to control short-term borrowing costs in that environment.

The Fed has been intervening in markets in the current fashion since mid-September, when short-term rates unexpectedly shot up on a confluence of factors, the biggest of which stemmed from corporate-tax payments and the settlement of Treasury debt auctions. The Fed has used similar operations for decades to manage short-term rates.

Since the large interventions started, money-market rates have calmed. The Fed is using temporary operations to tamp down any possible wild moves, while purchasing Treasury bills to build up reserves in the banking system. It hopes that by buying Treasury bills, the central bank will be able to cut back on repo interventions at the start of next year.

The central bank currently expects to buy Treasury bills through the middle of next year.

Central bankers have indicated they are still learning what level of reserves the financial system needs, which adds an element of uncertainty to the longer-term outlook for Fed market interventions. Fed officials stress their operations are technical in nature and that things like buying Treasury bills to grow holdings aren't a form of stimulus because they aren't designed to influence longer-term borrowing costs, as crisis-era bond buying was.

On Thursday, the Fed reported that its balance sheet had risen from $3.8 trillion in September to $4.07 trillion as of Wednesday. Some $208 billion in repo interventions were also outstanding as of Wednesday.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

December 09, 2019 10:56 ET (15:56 GMT)

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