By Michael S. Derby 

The Federal Reserve Bank of New York added $82.58 billion in new liquidity to financial markets Thursday, but the overall outstanding amount of interventions held roughly steady.

The Fed's money entered eligible banks' coffers in two ways. One was an overnight repurchase-agreement operation, or repo, that totaled $48.78 billion, the other was via a $33.80 billion 14-day repo.

In both cases so-called primary dealers took less than the Fed offered. Due to the expiration of past interventions, overall temporary central-bank liquidity ticked down $1.5 billion to $173.7 billion.

Fed repo interventions take in Treasurys, agency and mortgage bonds from the dealers, in what is effectively a short-term loan of central-bank cash, collateralized by the bonds. 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 temporary money the Fed has added to the banking sector has fallen even as its balance sheet has risen. Ahead of and during the move into 2020, the Fed flooded the market with money to ensure stability amid fears some banks might pull back on short-term lending. By and large, the effort worked.

Fed money-market interventions are aimed at keeping the federal-funds rate within the central bank's 1.5%-to-1.75% target range. That in turn helps to limit but not eliminate the volatility in 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.

On Wednesday, the Fed updated its plans for providing liquidity. It said it still plans to press forward with buying Treasury bills to build up underlying reserve levels through the second quarter. The repo effort, started in September and originally expected to end this month, will run through April, the Fed said. The Fed also tweaked its interest on excess reserves rate and its reverse repo rate to better ensure the fed-funds rate trades near the middle of the range.

In his press conference after the Federal Open Market Committee meeting, Fed Chairman Jerome Powell said he expects repo intervention s to be gradually reduced. He hopes that once reserves get to where the Fed wants by midyear or thereabouts, the Fed will be able to shrink Treasury-bill buying and refrain from further repo usage.

Mr. Powell added, however, that "even after we reach an ample level of reserves, it's possible that repo operations might play a role as a backstop and support effective control of the federal funds rate."

Mr. Powell also pushed back at those who see the Fed's balance sheet actions as a form of stimulus that is driving excessive risk taking in financial markets. Most economists agree with the Fed that its actions are technical, but many see parallels with what the Fed is doing now and its financial crisis era stimulus programs.

"It's very hard to say with any precision at any time what is affecting markets. What I can tell you is that you know what our intention is," which is to get reserves up to a level that will allow control over short-term interest rates. "This is a one-time thing we're doing, to adjust the level of reserves so money markets will be able to operate smoothly on an ongoing basis."

Mr. Powell also said he didn't see any signs of notable trouble in the financial sector, saying financial stability vulnerabilities "are moderate overall."

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

(END) Dow Jones Newswires

January 30, 2020 11:36 ET (16:36 GMT)

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