New York Fed Again Upsizes Liquidity Plans for Turn of the Year
December 12 2019 - 5:26PM
Dow Jones News
By Michael S. Derby
The Federal Reserve Bank of New York said Thursday it is again
increasing the scope of liquidity operations it is willing to offer
financial markets to ensure money-market rates remain relatively
calm over an uncertain year-end.
The bank, which handles the implementation of monetary policy
goals laid out by the rate-setting Federal Open Market Committee,
said its overnight provisions of liquidity available via overnight
repurchase agreements will rise to $150 billion, from the current
$120 billion cap, in operations planned for between Dec. 31 and
Jan. 2.
Overnight repos between Friday and Dec. 30 will hold steady at
the current size of $120 billion, and repos of that same size will
return each business day between Jan. 3 and Jan. 14.
The New York Fed said it will also offer large repo operations
to span the turn of the year. There will be a $75 billion that
starts on Dec. 31 and expires on Jan. 2. It also said it will
continue to offer two-week repos twice weekly, and will do a
separate repo operation to span the year-end which will be at least
$50 billion in size.
The sizes offered by the New York Fed are limits; if banks seek
less liquidity, the operation sizes will be smaller. Generally
speaking most recent overnight and short-term operation have seen
eligible banks take in less liquidity than the Fed was willing to
offer. Fed temporary operations were just over $200 billion as of
last week's data, the most recent available.
In a statement announcing the operations the bank said it "will
conduct repo operations to ensure that the supply of reserves
remains ample and to mitigate the risk of money market pressures
around year end that could adversely affect policy implementation."
The bank added that it "intends to adjust the timing and amounts of
repo operations as needed to mitigate the risk of money market
pressures that could adversely affect policy implementation."
Fed repo operations take in Treasury, agency and mortgage bonds
from eligible banks in exchange for short-term loans of cash. They
are effectively collateralized loans from the central bank, and
they are designed to ensure the financial system has enough
liquidity to keep short-term rates relatively steady.
The Fed has used repo operations, as well as purchases of
government securities, for decades to control short-term interest
rates, which is key to its ability to influence the direction of
the economy.
The Fed's response to the financial crisis and its aftermath,
however, put repo operations on the shelf for just over a decade.
The Fed started using them again in mid-September after interest
rates in the repo markets, where firms borrow and lend securities
and cash short-term, unexpectedly spiked.
The apparent cause of that spike was a large tax payment date
and settlements for Treasury debt auctions that affect how much
money was available in the banking system. Money market frictions
caused the federal-funds rate to break above its range, which was
an undesirable outcome for the Fed.
Since mid-September, the Fed has tamed short-term rates with a
series of large repo operations. In October it announced that it
would buy Treasury bills to permanently boost reserves in the
banking system and hopefully end the need for large repo
interventions by the end of January.
"Our operations have gone well so far," Federal Reserve Chairman
Jerome Powell told reporters after the rate-setting Federal Open
Market Committee meeting Wednesday. "Pressures in money markets
over recent weeks have been subdued," he said, adding, "We stand
ready to adjust the details of our operations as appropriate to
keep the federal-funds rate in the target range."
The Fed hasn't given much guidance on what will happen once the
turn of the year happens. New York Fed chief John Williams has
described the process the Fed is now engaged in as a learning
exercise.
That said, some market observers believe there are deeper
problems in money markets tied to changes in who can lend and their
willingness to act in times of friction. At the same time, the
Fed's regulatory chief, Randal Quarles, has said regulations may
also be playing a part in gumming up markets.
Write to Michael S. Derby at
michael.derby@wsj.com<mailto:michael.derby@wsj.com>
(END) Dow Jones Newswires
December 12, 2019 17:11 ET (22:11 GMT)
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