Coronavirus Repo Madness: Fed Pumps Overnight Liquidity To $175 Billion

The New York Federal Reserve Bank's emergency interventions on money markets came as a sudden cash crunch drove up the cost of borrowing the money that banks need to replenish the reserves they hold at the central bank
© AFP/File Eva HAMBACH

The Federal Reserve announced Wednesday that it would ramp up the amount of overnight loans available to banks to $175 billion.

This is the second increase in the overnight repurchase facility this week. On Monday, the Fed boosted it to $150 billion.
“Consistent with the FOMC directive to the Desk, these operations are intended to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures that could adversely affect policy implementation,” the Federal Reserve Bank of New York said in a statement. “They should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus.”

The Fed had hoped to begin winding down its repo market support this spring. But the strain on the economy and financial markets from the coronavirus appears to be making that unlikely.

The Fed said on Wednesday that it would extend a two-week repo facility of at least $45 billion, and add a one-month term repo of at least $50 billion.

That kind of long-term funding suggests that market participants are seeking sources of stability among volatile stock and bond markets. It’s likely that Treasury market volatility, where yields have swung wildly up and down for the past two weeks, is testing the smooth functioning of many parts of the financial system.

Many banks, particularly the largest and most systemically important, are likely to pull back from overnight and short-term lending to securities dealers and hedge funds if they fear financial markets will continue to tumble and the economy is likely to enter a recession.

 

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