By Michael S. Derby 

Big banks' demand for central-bank liquidity continued to wane Wednesday ahead of a Federal Reserve meeting that could update officials' plans for coming market interventions.

The Federal Reserve Bank of New York executed a $49.23 billion overnight repurchase-agreement operation, or repo, which was well under the $120 billion that the Fed was willing to offer. The money sought by the eligible banks -- or primary dealers -- caused overall temporary liquidity offered by the Fed to drop by $6.5 billion to $175.1 billion, due to the expiration of past Fed interventions.

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. 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.

After a decade long break, the Fed restarted repo operations in September in the wake of unexpected and large volatility in short-term rate markets. The volatility was such that the federal-funds rate, the focus of monetary policy, jumped out of its official range.

Now set at between 1.50% and 1.75%, the Fed seeks to control short-term rates to influence the overall cost of credit and achieve the job and inflation mandates set out for it by Congress. While a number of factors unsettled money markets, the Fed's interventions, which also include $60 billion a month in Treasury-bill buying to permanently increase financial system reserves, have kept rates calm.

After adding substantial money to financial markets around the turn of the year, temporary Fed liquidity has been moving down. The Fed's repo operations are scheduled to run through at least the middle of February.

The Fed's rate-setting Federal Open Market Committee wraps up a two-day meeting on Wednesday. There is a universal expectation that rates will be held steady. There is a good chance the Fed could update its plans for managing short-term rates on a longer run basis, economists said, and Fed Chairman Jerome Powell will almost certainly face questions on the matter at a press conference after the FOMC meeting.

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

(END) Dow Jones Newswires

January 29, 2020 09:55 ET (14:55 GMT)