The GraveYard Shift

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Then What?
Fed Adds Just Under $50 Billion In Temporary Liquidity Wednesday
Banks sought far less than the $120 billion the Fed was willing to offer
The Fed restarted its repo operations in September after unexpected market volatility and has steadily increased the sizes of its operations. Photo: karen bleier/Agence France-Presse/Getty Images
By Michael S. Derby
Jan. 15, 2020 11:46 am ET

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The Federal Reserve Bank of New York added $47.5 billion to financial markets Wednesday.

The intervention came in the form of an overnight repurchase agreement, or repo, operation. Eligible banks offered the Fed $26.5 billion in Treasurys and $21 billion in mortgage securities. Banks sought far less than the $120 billion the Fed was willing to offer.

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. Banks eligible to access these operations—the firms are called primary dealers—are limited in the amount of liquidity they can tap from the Fed.

When the Fed last updated information on its holdings on Thursday, it said its balance sheet stood at $4.11 trillion as of Jan. 9, versus $3.8 trillion in September. About $210.6 billion in repo interventions were also outstanding then.

Fed repo interventions are aimed at keeping the federal-funds rate within the 1.50% 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 has steadily increased the sizes of its operations.

The Fed had originally hoped that it could end repo operations at the end of the month as Treasury bill purchases aimed at growing the central bank’s balance sheet bolstered banking system reserves. But on Tuesday the Fed said it would continue to offer substantial amounts of liquidity through at least mid-February, with only modest cutbacks in future offerings.

“We thought the Fed would make no more than token cutbacks in its repo operations for the coming month, but we didn’t think the reduction would be quite this token,” said analysts at Wrightson ICAP.

The Fed “clearly had no interest in curtailing the scope of its repo injections in any material way over the course of the coming month,” and if primary dealers take everything the Fed offers, and it’s likely they won’t, that would generate a “theoretical maximum” of $240 billion of outstanding Fed repos in mid-February, the analysts said.

https://www.wsj.com/articles/fed-adds-just-under-50-billion-in-temporary-liquidity-wednesday-11579106794?mod=e2twcb