Fed plans to conduct daily repo operations until October 10

Fed plans to conduct daily repo operations until October 10

The New York Federal Reserve Bank said Friday it will inject billions into the USA financial plumbing on a daily basis for the next three weeks in an effort to prevent a spike in short-term interest rates.

The Federal Reserve plans to keep pouring tens of billions of dollars a day into the USA banking system through early October in a bid to avert another market disruption as the end of the quarter approaches, a time when lending typically diminishes. While there was similar turbulence in the so-called repo market in the period leading up to the financial crisis, economists say there's no need to worry this time, the financial system isn't about to seize up like it did in 2008. "There is too much collateral out there that needs funding", said Steven Zeng, interest rates strategist at Deutsche Bank in NY.

But this marks the Fed's first major operation in the repo market since the crisis and it has stirred speculation about underlying causes.

Analysts blamed the repo swings on huge demand for cash to pay for quarterly corporate taxes and the prior week's $78 billion worth of coupon-bearing Treasury supply for the market ruction earlier this week. It also announced daily repos for an aggregate amount of at least $75 billion each until October 10. The cash outflows also exposed the scarcity of reserves in the financial system, they said.

US Treasury yields rose on Wednesday and the yield curve flattened after the Federal Reserve cut interest rates for the second time this year, but indicated that further cuts may not follow.

The Fed jumped into action early on Tuesday, adding temporary cash on a large scale for the first time in more than a decade to calm jittery markets.

Banks have struggled in recent days to find the cash needed to meet reserve requirements which has pushed up short-term borrowing rates, prompting the New York Fed to pump billions into USA money markets with repo operations over the past four days.

"Reserves are concentrated, the excess reserves relative to the minimum level each bank is demanding is concentrated", she said.

The repo market describes 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.



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