Fed Returns to Repo Mkt; Says Might Expand Balance Sheet
Fed Returns to Repo Mkt; Says Might Expand Balance Sheet
In a week in which the Federal Reserve’s Federal Open Market Committee delivered a rate reduction to the Fed funds rate, it wasn’t even the biggest news. Not by a long shot. That was about as expected as anything can get in financial markets.
Instead, what had investors’ attention was a money markets operation by the Fed that was a surprise and hadn’t been done since the financial crisis of 2008-09. From Tuesday through Friday the Fed injected about $75 billion of daily liquidity through repo operations, in order to stabilize short term money markets. The rate to borrow cash overnight using Treasury securities as collateral surged Tuesday to as high as 10% as the amount of cash available to lend was exceeded by the demand to borrow it.
The Fed added money in the repo market, leading to a decline in short rates, which had risen sharply above the Fed funds rate. The move calmed markets and reduced the rate that lenders were charging in the market for overnight repurchase agreements, or repos. In a repo trade, Wall Street firms and banks offer U.S. Treasuries and other high-quality securities as collateral to raise cash, often overnight, to finance their trading and lending activities. The next day, borrowers repay their loans plus what is typically a nominal rate of interest and get their bonds back. In other words, they repurchase, or repo, the bonds.
These infusions came as the FOMC cut the Fed funds rate by 25 basis points to 1.75-2.00%, as expected.
Another surprise was a statement by Fed chairman Jerome Powell that the Fed would take up growing its balance sheet again. However, this doesn’t appear to be bond buying, or quantitative easing, but expanding its balance sheet in the normal course of providing liquidity by buying small amounts of Treasuries regularly to prevent the amount of money in the banking system declining, relative to an expanding economy.
“It is certainly possible that we will need to resume the organic growth of the balance sheet earlier than we thought,” Powell said in a press conference after the FOMC meeting Wednesday. Still, you have to wonder how a financial system with $1.5 trillion in excess bank reserves runs short on cash? Various technical factors have been trotted out as the culprits: from corporate taxes being due, settlement mismatches, and Saudi repatriation.
Of course, the criticism of the Fed’s rate cut move as not enough by President Donald Trump has become a ritual by now. See page 11.
The U.S. Treasury 10-yr note yield ended Friday around 1.72% versus 1.90% the previous week. The CME Fed futures market, surprisingly, shows only about a 42% probability of another 25 bps rate cut at the next FOMC meeting, down from over 50% not long ago.
Upcoming: 10/30-31 - FOMC meeting.
More from the author
Articles Read 1/2
🎁 Unlock 1 extra article by joining our Community!
Stay up to date with the latest articles. You’ll even get special recommendations weekly.
Already have an account? Sign In 3e0469-0a6ed1-06a593-6a8c17-a22653
Already have an account? Sign In 3e0469-0a6ed1-06a593-6a8c17-a22653
