Fed’s $100 Billion Repo Intervention Falls Short Of Bank Demand : Economics


By Michael S. Derby Updated March 4, 2020 9:43 am ETBig banks’ demand for central bank cash remained very strong on Wednesday, leading the Federal Reserve Bank to add a fresh $100 billion to the financial system.The Fed added the money via what’s called an overnight repurchase agreement operation, or repo. Eligible banks, called primary dealers, sought $111.48 billion from the central bank, exceeding the $100 billion cap the Fed places on overnight repos.The heavy demand for Fed cash reprised the strong interest seen for Fed money on Tuesday, when the Fed added even more money to the financial system. As of Wednesday morning, the total amount of Fed repos outstanding held steady from Tuesday at $195 billion.Repo outstanding levels had been falling over the recent weeks, but have ticked up over the last two days, although they are still short of the $255.62 billion that was outstanding on Jan. 1.Driving the demand for Fed repos are highly unsettled markets, as traders and investors try to respond to the coronavirus and its potential economic impact. Treasury yields have fallen to historic lows and the Fed implemented a half percentage point emergency rate cut on Tuesday that also impacted trading and money market conditions. Some market participants have pointed to a high demand to hold Treasurys as a force pushing up short-term rates.The repo market shook the financial world in September when an unexpected rate spike choked short-term lending, spurring the Federal Reserve to intervene. WSJ explains how this critical, but murky part of the financial system works, and why some banks say the crunch could have been prevented. Illustration: Jacob Reynolds for The Wall Street JournalOn Tuesday, the Fed lowered its overnight target range by half a percentage point to between 1.00% and 1.25%. Fed data Wednesday said the effective federal-funds rate stood at 1.59%, which was consistent where it should have been ahead of the rate cut. Other funding rates showed upward pressure however, the repo market broad general collateral rate was 1.63%, and the secured overnight financing rate was 1.64%.Referring to the market where banks and firms borrow and lend cash short-term, Wrightson ICAP told clients “we expect the rise in repo spreads to unwind in the days ahead, but have no particular insight into how long that will take.”Fed repo operations take in U.S. Treasury, agency and mortgage bonds from eligible banks in a de facto 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.Fed money-market interventions are designed to maintain the fed-funds rate target range. 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.Fed repos had been scheduled to wind down next month, and Treasury bill buying aimed at growing reserves was supposed to be completed sometime in the second quarter. But those plans could change amid the rapidly shifting economic and financial outlook. Some in the market are already wondering if the Fed will increase the size of its temporary operations to accommodate the high level of demand from banks.


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