By Michael S. Derby
The Federal Reserve Bank of New York said Thursday it is again increasing the scope of liquidity operations it is willing to offer financial markets to ensure money-market rates remain relatively calm over an uncertain year-end.
The bank, which handles the implementation of monetary policy goals laid out by the rate-setting Federal Open Market Committee, said its overnight provisions of liquidity available via overnight repurchase agreements will rise to $150 billion, from the current $120 billion cap, in operations planned for between Dec. 31 and Jan. 2.
Overnight repos between Friday and Dec. 30 will hold steady at the current size of $120 billion, and repos of that same size will return each business day between Jan. 3 and Jan. 14.
The New York Fed said it will also offer large repo operations to span the turn of the year. There will be a $75 billion that starts on Dec. 31 and expires on Jan. 2. It also said it will continue to offer two-week repos twice weekly, and will do a separate repo operation to span the year-end which will be at least $50 billion in size.
The sizes offered by the New York Fed are limits; if banks seek less liquidity, the operation sizes will be smaller. Generally speaking most recent overnight and short-term operation have seen eligible banks take in less liquidity than the Fed was willing to offer. Fed temporary operations were just over $200 billion as of last week's data, the most recent available.
In a statement announcing the operations the bank said it "will conduct repo operations to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures around year end that could adversely affect policy implementation." The bank added that it "intends to adjust the timing and amounts of repo operations as needed to mitigate the risk of money market pressures that could adversely affect policy implementation."
Fed repo operations take in Treasury, agency and mortgage bonds from eligible banks in exchange for short-term loans of cash. They are effectively collateralized loans from the central bank, and they are designed to ensure the financial system has enough liquidity to keep short-term rates relatively steady.
The Fed has used repo operations, as well as purchases of government securities, for decades to control short-term interest rates, which is key to its ability to influence the direction of the economy.
The Fed's response to the financial crisis and its aftermath, however, put repo operations on the shelf for just over a decade. The Fed started using them again in mid-September after interest rates in the repo markets, where firms borrow and lend securities and cash short-term, unexpectedly spiked.
The apparent cause of that spike was a large tax payment date and settlements for Treasury debt auctions that affect how much money was available in the banking system. Money market frictions caused the federal-funds rate to break above its range, which was an undesirable outcome for the Fed.
Since mid-September, the Fed has tamed short-term rates with a series of large repo operations. In October it announced that it would buy Treasury bills to permanently boost reserves in the banking system and hopefully end the need for large repo interventions by the end of January.
"Our operations have gone well so far," Federal Reserve Chairman Jerome Powell told reporters after the rate-setting Federal Open Market Committee meeting Wednesday. "Pressures in money markets over recent weeks have been subdued," he said, adding, "We stand ready to adjust the details of our operations as appropriate to keep the federal-funds rate in the target range."
The Fed hasn't given much guidance on what will happen once the turn of the year happens. New York Fed chief John Williams has described the process the Fed is now engaged in as a learning exercise.
That said, some market observers believe there are deeper problems in money markets tied to changes in who can lend and their willingness to act in times of friction. At the same time, the Fed's regulatory chief, Randal Quarles, has said regulations may also be playing a part in gumming up markets.
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(END) Dow Jones Newswires
December 12, 2019 17:11 ET (22:11 GMT)
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