Fed Adds Nearly $50 Billion to Markets, but Overall Temporary Liquidity Declines -- Update
January 27 2020 - 5:11PM
Dow Jones News
By Michael S. Derby
The Federal Reserve Bank of New York executed a $49.6 billion
overnight liquidity operation Monday that moderately reduced the
overall amount of temporary money the central bank has injected
into short-term financial markets.
The Fed's repurchase agreement operation, or repo, added nearly
$50 billion, as dealers submitted to the Fed $26.5 billion in
Treasurys and $23.1 billion in mortgages. Because of the expiration
of past interventions, the overall amount of liquidity added by the
Fed Monday declined $5.7 billion to $181.6 billion.
Fed repo interventions take in 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 -- they are called primary dealers -- 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.
The amount of outstanding Fed repos has fallen considerably
since the turn of the year. Then, the Fed, concerned that a variety
of factors would cause money-market lenders to refrain from their
normal lending, in turn pushing up rates, flooded the market with
money to ensure stability. Based on the lack of movement in rates,
it worked.
The year-end operations "are unwinding pretty smoothly," said
Scott Skyrm, executive vice president in fixed income and repo at
Curvature Securities. The average amount of outstanding repos
during the first two weeks of the year stood at $229 billion, and
over the last week it has averaged $150 billion, with no negative
impact on how short-term rates are performing, he said.
The Fed also added permanent liquidity to the financial system
via another round of Treasury bill buying Monday. It purchased $7.5
billion in bills, which have maturities of less than a year, in an
operation that saw primary dealers submit $25.5 billion to the
central bank.
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 controls the
fed-funds rate to influence the overall cost of borrowing in the
U.S. economy as part of its efforts to achieve the job and
inflation goals set for it by Congress.
The Fed restarted its repo operations in September after a
decadelong break in the wake of unexpected money-market volatility.
Demand for Fed money has waxed and waned, and by and large the Fed
has restored calm to markets and kept short-term rates where it
wants.
The Fed has used repo operations for decades to influence
short-term rate settings.
The Fed's short-term repo operations are scheduled to run
through the middle of February. They will likely go on for a number
of months longer than the end-of-January stop the Fed has
originally planned for, however. Treasury bill buying was supposed
to build up enough permanent liquidity in short-term markets to end
the need for repos, but there is now less certainty about what has
been causing frictions, and how to fix it.
The Fed's money-market plans and their effect on the central
bank's balance sheet are likely to be a focus of this week's
rate-setting Federal Open Market Committee meeting, which will be
held over Tuesday and Wednesday, followed by a press conference by
Fed Chairman Jerome Powell.
There are worries in markets, shared to some degree by Dallas
Fed leader Robert Kaplan, that the Fed's market interventions are
driving up financial-market risk taking, and that the longer the
buying goes on, the more problematic this might become. There are
also concerns that due to seasonal factors, there may even be a
shortage of Treasury bills for the Fed to buy, which might force
them into longer-dated securities, which may in turn bolster the
idea Fed money-market interventions are stimulus, and not
technical, as officials have claimed.
Write to Michael S. Derby at michael.derby@wsj.com
The central bank said last week 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.
(END) Dow Jones Newswires
January 27, 2020 16:56 ET (21:56 GMT)
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