By Michael S. Derby 

The New York Fed market interventions faced a conflicting demand for central bank liquidity on Wednesday.

On one hand, it implemented a $49.8 billion overnight repurchase agreement, or repo, operation with eligible banks that took in $31.5 billion in Treasurys, $1.5 billion in agencies and $16.9 billion in mortgages, in exchange for central bank money. But it also implemented a $15.6 billion reverse repo with other firms, mostly money market funds, that took liquidity out of the market, as five firms took Treasurys in exchange for a de-facto one day loan of cash to the central bank.

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. Reverse repos do the opposite and take in cash from money funds and similar firms in exchange for short-term loans of Treasurys.

For the repo operation, eligible banks -- called primary dealers -- took less than the $120 billion the Fed was willing to offer. Fed repo operation essentially maintains levels of liquidity the Fed has already added in past interventions, which have been going on in a large scale since September.

For some in the market, the size of the reserve repo operation points to possible frictions in the markets, as the firms that lent the Fed the Fed cash in exchange for Treasurys didn't tap private market sources.

The Fed said this past 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 in the wake of the financial crisis. About $229.5 billion in repo interventions were also outstanding on Wednesday, versus $210.6 billion on Jan. 9.

Fed money-market interventions are aimed at keeping the federal-funds rate within the 1.5%-to-1.75% target 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 has yet to settle on an enduring fix for keeping short-term rate movements orderly. Markets ran into trouble in September after a tax payment date and Treasury debt settlement caused some banks to pull back on lending to each other in short-term repo markets. While the Fed's liquidity isn't a bailout -- banks can only access it by handing bonds to the Fed -- central bank money has nevertheless improved lending in money markets.

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

(END) Dow Jones Newswires

January 22, 2020 15:47 ET (20:47 GMT)