Equities

Fed ramping up repo operations to head off year-end funding issues


The Federal Reserve is ramping up its operations to keep the overnight borrowing market moving efficiently, amid concerns that problems could build as 2019 comes to a close.Along with the daily operations the New York Fed has been conducting, there will be several additional offerings that will inject at least another $425 billion into a market that provides critical short-term funding for banks, according to an announcement.The new programs will entail a longer-maturity term repo operation running into the end of the year that will have an offering amount of at least $50 billion.Also, overnight repo operations on Dec. 31 and Jan. 2 will rise to at least $150 billion. Finally, the trading desk on Dec. 30 will offer a $75 billion repo that matures on Jan. 2.Repo operations involve short-term Fed offerings of cash in exchange for ultra-safe assets like Treasury bonds from banks. The system provides overnight funding that banks use to conduct business.Regular repo operations are for very short duration, but term repos run longer — often around three months but occasionally up to a year.On Sept. 17, the Fed began conducting its own operations to keep the market secure, following a spike in interest rates the day before due to a cash crunch. Among the issues that led to the spike were a rush of corporate tax payments and a large Treasury auction settlement, compounded by the unwillingness of banks with large levels of reserves to step in to provide liquidity.In addition to the short-term repos, the Fed also is buying Treasury bills from banks in an effort to make sure the central bank’s benchmark funds rate, which is used as a guidepost for other very short-term borrowing rates, stays within its targeted range of 1.5% to 1.75%.The announcement is significant in that it follows concerns expressed in several quarters about whether the Fed’s previous moves to quell the repo market were enough.The Bank for International Settlements, which acts as a consortium for global central banks, issued a report stating that the issues from September could arise again.In addition, Zoltan Pozsar, a New York Fed trading desk alumnus and now Credit Suisse analyst, warned in an extensive analysis earlier this week that the central bank may have to gear up a fourth round of quantitative easing — large-scale asset purchases — or face serious market issues before the end of the year.Chairman Jerome Powell said following this week’s Federal Open Market Committee meeting that the Fed was prepared to take additional measures as needed to quell the repo issues.

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