Fed will continue to support overnight markets Fed will continue to support overnight markets http://www.federatedinvestors.com/static/images/fed-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\line-graph-small.jpg October 3 2019 September 20 2019

Fed will continue to support overnight markets

It will inject more cash into the liquidity markets to alleviate trading pressure.
Published September 20 2019
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Repo markets stole the spotlight from the Federal Reserve’s policy-setting meeting this week, leading policymakers to tweak the rate that it pays on both excess reserves as well as the reverse repo facility and inject reserves into the system. With the goal being to quicken the return to effective policy rate control, today the Fed announced its intention to engage in temporary overnight and term repo transactions for the next few weeks, a significant commitment toward managing the stresses that were expected to surface over the quarter-end. In addition, Fed Chairman Powell implied it may move to more permanent reserve injections in October. Collectively, we expect these steps to corral repo rates within the Fed’s new 1.75-2% fed funds target range and reduce the volatility.

The action stems from earlier in the week when repo rates spiked. This volatility did not result from credit events but from technical factors related to the manner in which the Fed implements monetary policy under the current ample reserves regime.

In essence, a confluence of factors, chiefly the deadline for corporate quarterly tax payments and the settlement of $54 billion of net new U.S. Treasury supply, led to funding pressures over the past few trading sessions. That pushed rates on repo transactions with Treasury and agency collateral to an eye-popping 5% early in the week for the general collateral type of trades done by money market funds, and a Fed funds rate that moved outside of the Fed’s established target range. The volatility has been further exacerbated by reserve balances at the Fed that have declined to a level that may make it more difficult for the Fed to maintain control over the level of short-term interest rates.

 

Tags Liquidity . Interest Rates . Monetary Policy .
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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

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