Fed Dials Back Frequency of Repo Actions After Market Stabilizes

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(Bloomberg) -- The Federal Reserve will dial back its support for the market for repurchase agreements following signs that the recent upheaval in dollar funding has eased.

The move to reduce the amount of funding it offers through both overnight and term facilities from May 4 comes “in light of more stable repo market conditions,” the Federal Reserve Bank of New York said on its website Monday. The tone in markets has improved, with repo rates in check and other benchmarks such as the London interbank offered rate returning to less stressed levels.

As part of its wider effort to support markets and an economy that have been devastated by the coronavirus pandemic, the central bank had been offering a total of $1 trillion in overnight funding each day through its repo facility as well as $500 billion term funding actions several times a week. With demand for the facilities having diminished, it plans to step back, but it will remain a significant support for the market.

“The frequency of operations has been greatly reduced, but the Fed has maintained plenty of capacity via term and overnight repos,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities. “Of course if needed, the Fed can easily ramp these up.”

From May 4 onward, the Fed will conduct one rather than two overnight repo operations each day, a step that will halve the amount available to $500 billion. It also plans to halve the frequency of its three-month repo operations -- which also have a maximum size of $500 billion apiece -- to once every two weeks, although it will continue to do one-month actions every week.

The size of the Fed’s repo operations, which were initially implemented in the wake of funding market turmoil in September, remain significantly larger than they were before the virus pandemic.

The move also follows a swath of economic support measures from the Federal Reserve, including quantitative easing and various facilities to help credit markets.

©2020 Bloomberg L.P.

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