Fed Aims a Half-Trillion Dollar Liquidity Hose at Year-End Risks

(Bloomberg) -- The Federal Reserve Bank of New York is getting its house in order, ramping up measures to combat end-of-year funding risks and tapping permanent leaders to steer its interactions with markets.

The branch, which acts as the U.S. central bank’s eyes and ears on Wall Street through its markets group, on Thursday said it would conduct additional repurchase-agreement operations that could take the amount its support for funding markets over the crucial year-end period to more than half a trillion dollars. It also announced new senior leaders within that markets function, naming Daleep Singh as head of the group and appointing Lorie Logan to oversee the System Open Market Account.

An announcement by the Fed Thursday means that the central bank is now planning to offer a total of $490 billion in liquidity via repo operations for the turn of the year, including the $75 billion that it has already pumped in through three earlier term actions. It announced new term operations totaling $365 billion that will take place this month and next, as well as various changes to its overnight actions.

“The Fed either expects the take-up to be this large so they want to make sure that they provide that level or they just wanted to make sure everyone knew they weren’t going to undersize this,” said BMO Capital Markets strategist Jon Hill. “I wouldn’t expect this to be fully subscribed, but it should be comforting to market participants that this is available.”

The Fed has been conducting repo offerings and Treasury-bill purchases in a bid to keep control of short-term interest rates and bolster bank reserves. And while that has calmed markets since the 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.

Ready to Change

Fed Chairman Jerome Powell said Wednesday 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.

The Fed’s Dec. 16 operation is a 32-day offering with a maximum limit of $50 billion, while the other term actions range from 13 to 15 days with a maximum size of $35 billion, tenors it has used previously. Some of these will take place in January and do not provide year-end funding.

The central bank also plans to adjust the size of some of its overnight repo operations. While the offering size will remain mostly unchanged at $120 billion, it plans to conduct a one-day forward settlement operation of $75 billion on Dec. 30 that settles on Dec. 31 and matures Jan. 2. The New York Fed will also increase the sizes of the overnight actions to $150 billion on Dec. 31 and Jan. 2.

The New York Fed also announced its plans for Treasury-bill buying that it’s conducting as part of its reserve management regime, keeping the pace of purchases unchanged at $60 billion per month.

New Leaders

The New York Fed’s markets division, which is responsible for implementing interest-rate and other decisions by the Federal Open Market Committee, has been without a permanent leader since June. That was when New York Fed President John Williams ousted longtime official Simon Potter over disagreements related to managerial strategy.

Singh, the new markets boss, is a former U.S. Treasury official currently at investment firm SPX Capital, while Logan is a longtime staffer in the division who has been running SOMA as manager pro tem since Potter left. The branch also named Christopher Armstrong, who’s been at the New York Fed for 10 years, as head of the Financial Services Group. All three will have the rank of executive vice president.

©2019 Bloomberg L.P.

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