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.
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.
https://www.marketscreener.com/news/Fed-Adds-Nearly-50-Billion-to-Markets-but-Overall-Temporary-Liquidity-Declines-Update–29897797/
