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 firstname.lastname@example.org
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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