Fed Adds $52.6 Billion To Markets As Central Bank Official Defends Operations
January 17 2020 - 11:29AM
Dow Jones News
By Michael S. Derby
The Federal Reserve Bank of New York added $52.6 billion in
short-term liquidity to the financial system Friday to help money
markets get through the weekend.
The Fed added the money in a repurchase agreement operation, or
repos, that took in $10.9 billion in Treasurys and $40.8 billion in
mortgages. Demand from eligible banks, known as primary dealers,
was lower than the $120 billion the Fed had on offer. But
unusually, the dealers submitted more mortgage bonds to the Fed
than Treasurys.
The demand for liquidity Friday was less than what some analysts
had expected. Ahead of the operation, Wrightston ICAP said it
expected a "surge" in demand as dealers replaced expiring
longer-dated Fed repos with overnight repos. But the firm expects
that over time demand for short-term Fed repos should wane.
Fed repo interventions take in U.S. Treasurys, agency and
mortgage bonds from eligible banks in what is effectively a
short-term loan of central-bank cash, collateralized by the
securities. The banks tapping this cash are limited in the amount
of liquidity they can take in exchange for their securities, and
they pay interest to the central bank to get the funds.
Fed money-market interventions are aimed at keeping the
federal-funds rate within the 1.5% and 1.75% range, and to limit
the volatility of other money-market rates. The Fed restarted its
repo operations in September after unexpected market volatility and
steadily increased the sizes of its operations. Demand for Fed
money has waxed and waned and by and large, the Fed has restored
calm to markets.
The Fed said Thursday that its balance sheet stood at $4.18
trillion as of Wednesday, versus $3.8 trillion in September. Peak
Fed holdings were $4.5 trillion. About $229.5 billion in repo
interventions were also outstanding on Wednesday, versus $210.6
billion on Jan. 9.
The Fed's interventions have been controversial. The Fed had
originally intended to wind down the temporary operations at the
end of the month. Instead, it has extended them until at least
mid-February. Some Fed officials have signaled they'll likely go on
for even longer, and markets don't see any imminent end to the
repos either.
The Fed's balance sheet has expanded on the repo operations, but
it has also grown because the Fed is buying Treasury bills to
expand its holdings and boost the level of reserves in the
financial system to a level that officials hope will negate the
need for active and temporary interventions. Speaking Friday in New
Jersey, Philadelphia Fed leader Patrick Harker said the Fed
"remains committed to implementing monetary policy in a regime of
ample reserves, which, again, does not require active management of
the supply of reserves."
A broad swath of financial markets doesn't see the Fed's
interventions as technical and believes the Fed's injections are a
form of stimulus along the lines of its so-called quantitative
easing bond buying policies during and after the financial crisis.
Many in markets also believe that the money the Fed is adding is
also driving up stock prices more than economic fundamentals
suggest is prudent.
Earlier this week, Dallas Fed leader Robert Kaplan, once a
former top executive at investment bank Goldman Sachs Group Inc.,
said he was sympathetic with that view and added he'd like to see
the Fed end its current money market practices as soon as it
can.
But on Friday, Minneapolis Fed leader Neel Kashkari, who is also
a former Goldman Sachs employee and formerly the leader of the
government's crisis-era bailout efforts, rejected the view the
central bank is pumping the markets.
Mr. Kashkari wrote on Twitter "QE conspiracists can say this is
all about balance sheet growth. Someone explain how swapping one
short term risk free instrument (reserves) for another short term
risk free instrument (t-bills) leads to equity repricing. I don't
see it."
When Mr. Kashkari faced some pushback from those who rejected
this take, he wrote "1 thing I've learned abt twitter is the louder
the critic, generally the thinner the skin. I confess finding
amusement in needling critics calling them conspiracists or
goldbugs. Its fun to watch swashbuckling pirates of free market
capitalism get easily upset. I mean no offense."
Write to Michael S. Derby at
michael.derby@wsj.com<mailto:michael.derby@wsj.com>
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
January 17, 2020 11:14 ET (16:14 GMT)
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