By Michael S. Derby
Wall Street's biggest banks took advantage Monday of the Federal Reserve Bank of New York's willingness to offer more temporary liquidity to the financial system amid deeply unsettled markets conditions.
Eligible banks, known as primary dealers, tapped $112.93 billion in central-bank liquidity via the New York Fed's overnight repurchase-agreement operation, or repo. That was up significantly from what the banks sought Friday but was under the newly upsized $150 billion cap the New York Fed has on overnight operations.
Monday's overnight repo took place as $89.61 billion in repos were maturing from Friday, leading the overall amount of Fed temporary liquidity afforded to markets to rise to $202.9 billion.
Earlier Monday, the New York Fed said that it was increasing the maximum size of its temporary market interventions. With the top size of the overnights rising to $150 billion, longer term repos increased from a $20 billion cap to $45 billion.
The New York Fed's operation Monday came amid heavy market pressures, as stocks sold off, Treasury yields dove through historic lows and oil prices plunged. The New York Fed said in a statement that its bigger repos "should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus."
Part of what has been driving increased demand for Fed repos is the broader push into U.S. Treasurys as a safe harbor investments. That has been causing some pressure in money markets rates, although the Fed has had no issue controlling the federal-funds rate level. Some market participants saw the increased repo sizes as a way to calm troubled markets.
"Our sense is that today's increase is meant to boost confidence and prevent any future tightening in secured funding, rather than counteracting current pressure," Barclays Capital said in a note.
Increased repo operation sizes weren't unexpected. In a speech last week, New York Fed leader John Williams, who also serves as vice chairman of the rate-setting Federal Open Market Committee, hinted at the looming change, saying the Fed would be "flexible and ready to make adjustments" to make sure "monetary policy is effectively implemented and transmitted to financial markets and the broader economy."
Fed repo operations take in U.S. Treasury, agency and mortgage bonds from primary dealers in a de facto short-term loan of central-bank cash, collateralized by those securities. Primary dealers have individual limits 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 Fed has intervened in money markets 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. Compared with the 1% and 1.25% fed-funds target rate, the effective fed-funds rate stood at 1.09% on Friday, according to the central bank.
The Fed had been engaged in a process of shrinking the size of repo operations, which restarted in September after nearly a decadelong break. The peak of repo operations happened on Jan. 1, when they hit $255.62 billion, as the Fed flooded markets with liquidity to ensure a smooth transition from 2019 in 2020.
Write to Michael S. Derby at firstname.lastname@example.org