By Michael S. Derby
The New York Fed added $77.09 billion in liquidity to financial markets on Wednesday, on a day where the U.S. central bank leader again affirmed that the operation and ones like it don't have any implications for the broader economy.
The intervention came by way of an overnight repurchase agreement operation. Eligible banks offered the New York Fed $67.84 billion in Treasurys and $9.25 billion in mortgage-backed securities, and the central bank accepted all of it.
Fed repo interventions take in Treasury and mortgage securities from eligible banks in what is effectively a short-term loan of central-bank cash, collateralized by the bonds.
The Fed's market interventions are aimed at ensuring that the financial system has enough liquidity and that short-term borrowing rates remain well-behaved, with the central bank's federal-fund rate staying within the 1.5% to 1.75% target range. The effective fed-funds rate stood at 1.55% on Tuesday. The broad general collateral rate for repo trading stood at 1.54%, also for Tuesday.
The Fed's interventions, which began in large size in mid-September, aren't designed to serve as stimulus. The temporary operations have kept short-term rates largely in line with central bank goals, after spiking unexpectedly in September.
While the sizes of recent operations are large, the practice of adding and subtracting liquidity from short-term markets to manage short-term interest rates goes back decades. The Fed hopes the large temporary operations won't be needed after January.
Federal Reserve Chairman Jerome Powell told Congress Wednesday the Fed is still studying what caused short-term rates to spike in September. He also said that as of now, what the Fed is doing to keep markets calm is "technical" and "I think we have it under control." Mr. Powell also said the issue around money-market rates "doesn't really have any implications for the economy or the general public."
The Fed is also buying Treasury bills to increase the size of its balance sheet and to add permanent liquidity to the financial system, and it hopes that effort will reduce the need for large temporary interventions.
Write to Michael S. Derby at email@example.com
(END) Dow Jones Newswires
November 13, 2019 13:21 ET (18:21 GMT)
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