Fed Adds $82 Billion to Financial Markets

Big banks’ demand for longer-term Federal Reserve liquidity flared up again on Tuesday, on a day where the central bank extended its plans to intervene in markets into mid-February.

The Federal Reserve Bank of brand-new York said the idea intervened twice via repurchase agreements, or repos. Eligible banks drew $47 billion in overnight liquidity coming from the central bank, less than the $0 billion the Fed was willing to provide. although the 14-day repo saw banks offer the Fed $43.2 billion in securities, against the Fed’s $35 billion cap. Collectively, the Fed added $82 billion in temporary liquidity to the financial system.

On Monday, the Fed had added $60.7 billion overnight liquidity.

Fed repo interventions take in U.S. Treasurys, agency along with mortgage bonds coming from eligible banks in what can be 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 inside the amount of liquidity they can tap coming from the Fed.

When the Fed last updated information on its holdings on Thursday, the idea 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% along with 1.75% range, along with to limit the volatility of some other money market rates.

The Fed restarted its repo operations last September after unexpected market volatility along with steadily increased the sizes of its operations.

On Tuesday, the brand-new York Fed announced its plans to press forward with overnight along with longer-term repo operations until at least Feb. 13. the idea maintained the maximum size of overnight operations at $0 billion, along with kept term repo operations at a cap of $35 billion per intervention through the end of January. Term repos between Feb. 4 along with Feb. 13 will be lowered to a $30 billion per intervention cap.

The Fed had initially planned to end its repo interventions at the end of the month although continuing issues in money markets have extended the horizon for the effort. Some on Wall Street think the repo operations could continue into the early summer. Meanwhile, the Fed can be weighing some other options, like the adoption of brand-new tools or brand-new paths to liquidity, as a longer-term solution.

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 that will critical, although murky part of the financial system works, along with why some banks say the crunch could have been prevented. Illustration: Jacob Reynolds for The Wall Street Journal

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

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Source : Fed Adds $82 Billion to Financial Markets