By Michael S. Derby 

The New York Fed added $56.45 billion in short-term liquidity to the financial sector Friday to get markets through the weekend.

The central bank added the money via a three-day repurchase agreement, or repo, operation. 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.

In Friday's operation, eligible banks tapped far less liquidity than the $120 billion the central bank was willing to provide.

The Fed's money-market operations are aimed at ensuring that the financial system has enough liquidity to keep short-term borrowing rates 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 Fed has repeatedly said repo operations are technical in nature and have no broader economic implications.

In money markets Thursday, the effective fed-funds rate stood at 1.55% and the broad general collateral rate for repo trading stood at 1.49%.

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.

The current rate-control tool kit is designed to influence short-term borrowing costs in an environment where banks hold substantial amounts of money on hand for regulatory and other reasons.

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.

Fed interventions have calmed markets considerably, even though there remains significant uncertainty about what will happen over the turn of the year, when money-market pressures are expected to rise up, although no one knows by how much.

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.

On Thursday, the Fed announced that it would increase the size and scope of liquidity it plans to offer over the turn of the year. The Fed has repeatedly signaled it will be flexible and active to make sure the move into 2020 is a smooth one for money markets.

Yet anxiety remains. Ian Lyngen, a market strategist with BMO Capital Markets, told clients in a note that "in spite of the massive scale of this liquidity provision, the year-end turn is still trading around 4%, which is disconcerting and speaks to the level of angst on funding desks." That said, he reckons the Fed's latest move should help: "If there was any doubt as to whether the Fed would do everything they could to pump the system full of reserves, [Thursday's announcement] should calm those fears, even if the regulatory constraints remain."

The Fed reported Thursday that as of Wednesday there were some $213 billion in repos outstanding, against $208 billion the week before. The total size of the Fed's balance sheet rose from $4.07 trillion to $4.10 trillion on Wednesday.

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

(END) Dow Jones Newswires

December 13, 2019 09:57 ET (14:57 GMT)

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