Fed to Increase Temporary Liquidity Available to Markets

The Federal Reserve Bank of New York PHOTO: EDUARDO MUNOZ/REUTERS

The Federal Reserve Bank of New York is boosting the amount of temporary liquidity it is willing to make available to financial markets starting this week, the bank said on Wednesday.

It said that as of Thursday, the minimum size of its overnight repurchase-agreement, or repo, operations will rise to $120 billion, from what had been at least $75 billion. Longer-term operations will rise from a minimum daily offering size of $35 billion and go up to $45 billion in interventions scheduled for Thursday and Oct. 29. The longer-term repo operations are scheduled to carry over into November.

The Fed said it was raising the minimum operation sizes “to mitigate the risk of money market pressures that could adversely affect policy implementation.”

Fed repo operations add liquidity to financial markets by loaning cash to eligible banks in return for taking in Treasury debt, which effectively functions as collateral for the loans. The Fed restarted large-scale repo operations a month ago when confronted with unexpectedly big swings in money market borrowing rates.

Interest rates spiked ahead of the September Federal Open-Market Committee meeting for a number of factors. Much of it was due to tax payments and Treasury debt settlements. But as part of an effort to tamp down on market volatility, the New York Fed have made large-scale repos a regular occurrence again.

The increased size of the operations announced by the New York Fed Wednesday come as the Federal Open Market Committee is about to meet to deliberate on monetary policy next week. The panel is widely expected to lower rates again by a quarter percentage point next Wednesday. The Fed’s increased liquidity offering could be a bid to further ensure market rates don’t spike again, as they did ahead of the September FOMC meeting.