More cash from Fed awaits US lenders

More cash from Fed awaits US lenders
Banks and Wall Street rely on the $2.2 trillion repo market for daily cash to fund loans and trades in other markets.

New York - Decline in bank reserves contribute to market's choppy behaviour recently

By Reuters

Published: Sat 21 Sep 2019, 10:11 PM

Last updated: Sun 22 Sep 2019, 12:13 AM

The US Federal Reserve plans to keep pouring tens of billions of dollars a day into the US 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.
Earlier last week, interest rates in the repurchase agreement, or repo, market soared to levels not seen since the height of the global credit crisis in 2008.
Banks and Wall Street rely on this $2.2 trillion market for daily cash to fund their loans and trades in other markets, including stocks and bonds.
Since Tuesday, the Fed has held four rounds of repo operations, with banks and dealers borrowing from the central banks with their Treasuries and other bonds as collateral. This has added up to $75 billion each day in the banking system.
On Friday, the New York Fed, which implements the central bank's market actions, said it will conduct more repo operations into October in overnight and longer-term loans.
"Quarter-end is the issue. There is too much collateral out there that needs funding," said Steven Zeng, interest rates strategist at Deutsche Bank in New York.
"The Fed is essentially helping to provide a funding backstop for those positions." Repo rates hit 10 per cent on Tuesday, propelling other short-term rates sharply higher. They were at 1.85 per cent-1.95 per cent early Friday afternoon.
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 last week.
Treasury issuance will be a factor again as the quarter comes to a close: Monday, September 30, will be the settlement date for $113 billion of Treasury notes that will be auctioned this week.
Analysts also said a decline of bank reserves contributed to the market's choppy behaviour. They are down to about $1.4 trillion from $2.3 trillion in 2017 as the Fed has reduced its bond holdings.
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.
This move was on top of the Fed cutting the interest it pays banks on reserves and reverse repos on Wednesday. What alarmed the Fed on Tuesday, some analysts say, unlike recent episodes when repo rates spiked, was that there was a strong indication the borrowing cost in the federal funds market was rising above the top end of the central bank's target range, which was 2-2.25 per cent at the time.
The Federal Reserve targets the federal funds rate to conduct monetary policy.
If this condition were to persist, it could stoke fears in markets that policymakers are losing control of short-term interest rates, analysts said.
Dallas Fed president Robert Kaplan told reporters after an event in Corpus Christi, Texas that the central bank "should be seriously examining plans to let the balance sheet increase with growth in the demand for reserves".
Until the Fed comes up with longer-term fixes such launching a standing repo facility and/or increasing purchases of Treasuries for its balance sheet growth, the central bank will likely keep up with these repo operations to fill gaps in daily funding, analysts said.
"Funding conditions are getting better," Zeng said. "This is the Fed being cautious."

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