Fed Opens Door to Buying More Than T-Bills If Needed to Fix Repo
The Fed chief went on to say, though, that the current regime of bill purchases is going well and according to expectations.
(Bloomberg) -- The Federal Reserve is willing to extend its reserve management related purchases of Treasuries to coupon-bearing securities if needed, according to Chairman Jerome Powell.
“We’re not at this place, but if it does become appropriate for us to purchase other short-term coupon securities, then we would be prepared to do that if the need arises,” he said at his post-decision news conference Wednesday. The Fed is “willing to adapt” its strategy on bill purchases, Powell said.
The Fed chief went on to say, though, that the current regime of bill purchases is going well and according to expectations.
“From Powell’s perspective, there’s no real downside to leaving the door open, whereas closing the door could leave them open to speculation about the Fed’s willingness to do what’s necessary,” said Jonathan Cohn, an interest-rate strategist at Credit Suisse.
The yield on U.S. two-year Treasuries fell as much as 4.7 basis points to 1.61% in the aftermath of the Fed’s Wednesday announcements, while the spread between two- and five-year securities flattened by 1.1 basis points, reaching 2.1 basis points.
The Fed has been conducting repo operations and Treasury bill purchases in a bid to keep control of short-term interest rates and bolster bank reserves into the system. And while that has calmed markets since a September spike that took overnight repo rates as high as 10%, concerns about the year-end period remain and participants have been flocking to Fed term offerings that will carry them through to January.
Powell also said that repo operations have “gone well so far” and “pressures in money-markets in recent weeks have been subdued.”
Credit Suisse’s Cohn believes the Fed could expand to short-dated Treasury purchases sooner rather than later. For starters, primary dealers have twice as many Treasury coupons maturing in less than two years than they have of T-bills, New York Fed data show. Waning interest in selling bills to the central bank could also spur an expansion to short-dated coupon debt.
Whereas bill offerings were at least four to five times oversubscribed a month-and-a-half ago, the subscription levels have continued to drop, “which would be indicative of growing resistance to sell those bills,” Cohn said. “That would serve as a source of motivation to more seriously consider Fed purchases of short-term coupon securities.”
Year-end pressures are starting to appear across major global funding markets as the world looks to the Fed for more answers about how to stem dysfunction in short-end rates.
The Fed boss said temporary upward pressures on short-term money-market rates aren’t unusual around year-end and “pressures appear manageable.”
He said the central bank stands ready to adjust details of its repo operations as appropriate to keep the fed funds rate within the central bank’s target range. Powell said that as the underlying level of reserves moves up because of bill purchase, there will be a time when it will be appropriate for overnight- and term-repo offerings “to gradually decline,” though the timing is uncertain.
The purpose of the Fed’s measures “isn’t to eliminate all volatility, particularly in the repo market,” he said. “The purpose is to ensure monetary policy decisions are transmitted to the fed funds rate.”
Powell also said he’s open to ideas for modifying supervisory practices that don’t undermine the safety and soundness of the financial system.
To contact the reporters on this story: Alexandra Harris in New York at aharris48@bloomberg.net;Benjamin Purvis in New York at bpurvis@bloomberg.net;Christopher Condon in Washington at ccondon4@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Nick Baker
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