By Michael S. Derby 

The Federal Reserve Bank of New York intervened on Thursday with two temporary additions of liquidity that nevertheless amounted to a modest reduction in the overall amount of temporary liquidity the central bank is adding to financial markets.

The Fed added cash to money markets by a total of $74.2 billion via $44.15 billion in overnight repurchase agreements, or repo and via a $30 billion 14-day repo operation. But because of the expiration of past operations, the outstanding amount of short-term Fed liquidity injections fell by $10 billion to $176.1 billion.

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.

Later Thursday, the Fed also reported that money-market funds and other eligible firms took additional liquidity out of the system via what are called reverse repos. In these transactions, the firms parked money at the Fed in exchange for $12.9 billion in Treasurys. That operation means the Fed had a cumulative decline in outstanding temporary liquidity of $22.9 billion for the day.

Fed money-market interventions aim to keep the federal-funds rate within the central bank's 1.5%-to-1.75% target range and limit the volatility of other money-market rates. The Fed restarted its repo operations in September after a decade long break due to unexpected money market volatility. From there, it 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 on Thursday that as of Wednesday its balance sheet stood at $4.15 trillion, down $29.9 billion from the week before. Fed holdings were at $3.8 trillion in September and peak Fed holdings were $4.5 trillion in the wake of the financial crisis. About $186.1 billion in repos were outstanding on Wednesday.

The Fed had expected to stop its repo operations at the end of the month, but recently extended them into mid-February. Most now expect the repo operations will continue for some time, even as the Fed buys $60 billion a month in Treasurys to bolster banking-sector reserves and diminish the need for repo intervention tweaks.

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, even as its fueled fears the central bank is driving unwarranted risk taking in financial markets.

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

(END) Dow Jones Newswires

January 23, 2020 17:42 ET (22:42 GMT)

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