By Michael S. Derby
The Federal Reserve Bank of New York added $52.6 billion in short-term liquidity to the financial system Friday to help money markets get through the weekend.
The Fed added the money in a repurchase agreement operation, or repos, that took in $10.9 billion in Treasurys and $40.8 billion in mortgages. Demand from eligible banks, known as primary dealers, was lower than the $120 billion the Fed had on offer. But unusually, the dealers submitted more mortgage bonds to the Fed than Treasurys.
The demand for liquidity Friday was less than what some analysts had expected. Ahead of the operation, Wrightston ICAP said it expected a "surge" in demand as dealers replaced expiring longer-dated Fed repos with overnight repos. But the firm expects that over time demand for short-term Fed repos should wane.
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.
Fed money-market interventions are aimed at keeping the federal-funds rate within the 1.5% and 1.75% range, and to limit the volatility of other money-market rates. The Fed restarted its repo operations in September after unexpected market volatility and 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 Thursday that its balance sheet stood at $4.18 trillion as of Wednesday, versus $3.8 trillion in September. Peak Fed holdings were $4.5 trillion. About $229.5 billion in repo interventions were also outstanding on Wednesday, versus $210.6 billion on Jan. 9.
The Fed's interventions have been controversial. The Fed had originally intended to wind down the temporary operations at the end of the month. Instead, it has extended them until at least mid-February. Some Fed officials have signaled they'll likely go on for even longer, and markets don't see any imminent end to the repos either.
The Fed's balance sheet has expanded on the repo operations, but it has also grown because the Fed is buying Treasury bills to expand its holdings and boost the level of reserves in the financial system to a level that officials hope will negate the need for active and temporary interventions. Speaking Friday in New Jersey, Philadelphia Fed leader Patrick Harker said the Fed "remains committed to implementing monetary policy in a regime of ample reserves, which, again, does not require active management of the supply of reserves."
A broad swath of financial markets doesn't see the Fed's interventions as technical and believes the Fed's injections are a form of stimulus along the lines of its so-called quantitative easing bond buying policies during and after the financial crisis. Many in markets also believe that the money the Fed is adding is also driving up stock prices more than economic fundamentals suggest is prudent.
Earlier this week, Dallas Fed leader Robert Kaplan, once a former top executive at investment bank Goldman Sachs Group Inc., said he was sympathetic with that view and added he'd like to see the Fed end its current money market practices as soon as it can.
But on Friday, Minneapolis Fed leader Neel Kashkari, who is also a former Goldman Sachs employee and formerly the leader of the government's crisis-era bailout efforts, rejected the view the central bank is pumping the markets.
Mr. Kashkari wrote on Twitter "QE conspiracists can say this is all about balance sheet growth. Someone explain how swapping one short term risk free instrument (reserves) for another short term risk free instrument (t-bills) leads to equity repricing. I don't see it."
When Mr. Kashkari faced some pushback from those who rejected this take, he wrote "1 thing I've learned abt twitter is the louder the critic, generally the thinner the skin. I confess finding amusement in needling critics calling them conspiracists or goldbugs. Its fun to watch swashbuckling pirates of free market capitalism get easily upset. I mean no offense."
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(END) Dow Jones Newswires
January 17, 2020 11:14 ET (16:14 GMT)
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