Fed Bows to Market Demand for Repo by Boosting Size of Actions
N.Y. Fed Boosts Size of Repo Ops After Offerings Oversubscribed
(Bloomberg) -- The Federal Reserve Bank of New York is yielding to demand for repurchase-agreement operations by boosting the size of its offerings as rates remain elevated ahead of the end of the quarter.
The move comes as the former head of the branch’s markets group on Wednesday praised the organization’s “deep bench” of talent and noted its effective implementation of Federal Open Market Committee policy.
The New York Fed, which has been working to keep funding markets on an even keel since a spike in rates early last week, announced an increase in the size of its repo operations for Thursday to levels more in line with recent bidding.
“Rather than run the risk of not having enough liquidity provisions, the New York Fed is erring on the side of providing more than required right now,” said BMO Capital Markets strategist Jon Hill. “They’re trying to be aggressive.”
The central bank has been injecting liquidity into the funding markets since Sept. 17, when the rate on overnight general collateral repo jumped to 10%, about four times greater than usual levels, as cash reserves were out of alignment with the volume of securities on dealer balance sheets.
The New York Fed is drawing scrutiny as it responds to funding upheavals, with debate swirling about its response.
The branch’s former markets overseer Simon Potter, speaking at a public event for the first time since he left the bank, did not speak directly about repo markets. He did, however, say that the New York Fed has a “deep bench of talent” and offered praise for Lorie Logan, its senior vice president of market operations monitoring.
Potter, who was abruptly dismissed by New York Fed President John Williams earlier this year, said on a private call hosted by Bank of America last week that policy makers may have to expand the central bank’s balance sheet through outright purchases of Treasuries to ensure stable liquidity conditions.
Bigger Operations
The New York Fed on Wednesday doubled the maximum size of Thursday’s 14-day term repo operation to an aggregate limit of $60 billion, according to its website. That’s close to the $62 billion of bids submitted for an action on Tuesday, which had a limit of $30 billion. The maximum size of the overnight repo operation for Thursday was lifted to $100 billion from $75 billion, following a Wednesday offering that attracted $92 billion of submissions.
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While funding markets are breathing a little easier in the wake of the Fed’s actions over the past week, markets point to elevated rates for quarter-end, and participants will increasingly turn their focus to year-end conditions should tension remain.
“The New York Fed wants quarter-end to be quite boring,” BMO’s Hill said. “The operations will significantly mute upward pressure on rates, but it won’t eliminate the stress 100%.”
To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum
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