Fed announces plans to provide more support for repo market

Jerome Powell

FILE – In this Wednesday, Sept. 18, 2019 file photo, Federal Reserve Board Chair Jerome Powell speaks at a news conference following a two-day meeting of the Federal Open Market Committee in Washington. A peculiar thing is happening in financial markets this week _ a corner of the financial system where banks and others go for billions of dollars in short-term loans is suddenly in need of cash. To that end, the Federal Reserve has stepped in to inject about $200 billion into the market over the past three days, with plans for another $75 billion on Friday. (AP Photo/Patrick Semansky, File)

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WASHINGTON (AP) — The Federal Reserve will keep pumping cash into a vital but obscure corner of U.S. financial markets in coming weeks.

The New York Federal Reserve Bank, which handles the central bank’s interactions with financial markets, said Friday that it will offer daily repurchase, or “repo,” operations of at least $75 billion through Oct. 10. The aim is to maintain the Fed’s key policy rate within its target range.

For the first time since the 2008 financial crisis, the Fed this week conducted a series of major repo operations, injecting $278 billion into the market to deal with a jump in short-term interest rates.

Officials say this week’s spike in rates is not a precursor of the type of underlying troubles that preceded the 2008 market meltdown.

In addition to the daily overnight operations of $75 billion, the New York Fed said it would conduct longer 14-day repo operations of at least $30 billion on Tuesday, Thursday and Friday of next week.

The Fed said that it would be ready to conduct further operations as needed after Oct. 10 but the amount and timing of those auctions has not been determined.

In the fourth operation on Friday, banks asked for $75.55 billion in reserves, only slightly higher than the $75 billion limit set by the Fed.

The Fed began conducting these operations to calm money markets. Rates on short-term repo agreements had briefly spiked to nearly 10% earlier this week as financial firms scrambled to find short-term funding.

The Fed seeks to manage its operations to keep the repo rate near the target it has set for its key policy rate, the federal funds rate, the interest that banks charge each other for overnight borrowing.

The Fed announced on Wednesday that it was cutting the benchmark rate by a quarter-point to a new range of 1.75% to 2% as it seeks to cushion the U.S. economy from various threats, ranging from a slowing global economy to shocks from President Donald Trump’s trade war with China.

The repo market covers billions of dollars of daily operations in which one party lends out cash in exchange for a roughly equivalent value of securities, usually Treasury notes. The market allows companies that own lots of securities to get the cash they need at cheap rates.

The borrower of the cash agrees to repurchase the securities it has loaned as collateral at a later date, often as soon as the next day.

The turbulence this week has been attributed to various factors, including corporations needing to come up with cash to settle quarterly tax payments.

Analysts do not believe the rate spike this week is similar to the troubles seen as the nation was heading into the 2008 financial crisis. They believe banks are much better capitalized now due to the reforms put in place after the crisis.

Copyright 2021 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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