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Fed Pledges More Than $500 Billion to Keep Funding Markets Calm

Alexandra Harris

(Bloomberg) -- The Federal Reserve is trying to get ahead of possible funding disruptions caused by the coronavirus, ramping up cash injections in the coming weeks to as much as $505 billion in a bid to keep short-term financing markets functioning smoothly through quarter-end.

The central bank’s New York branch said Wednesday that it would conduct additional repurchase-agreement operations that could take its support for this crucial corner of the financial markets beyond the total of $490 billion it offered over year-end. Policy makers are trying to avert a repeat of September, when short-term borrowing costs spiked amid imbalances in the supply and demand for cash.

The Fed’s announcement covers operations starting Thursday, and comes as stocks are plummeting on concern about the damage to the economy from the viral outbreak, which the World Health Organization is now calling a pandemic. Turbulence in Treasuries, where yields sank to record lows this week, may have played into the Fed’s approach. Volatility in spreads between the cheapest-to-deliver Treasury securities and their associated futures contracts appeared to draw a response from regulators, analysts said.

“The market moves have been so violent and disturbing,” said Jefferies money-market economist Thomas Simons. “That would suggest to me that if you’re the Fed you’d want to flood the market with liquidity ahead of time rather than play catch-up.”

On Monday, the New York Fed unexpectedly increased the size of this week’s repo offerings to $150 billion for the overnight action and $45 billion for the term as financial markets convulsed, up from $100 billion and $20 billion, respectively.

The Fed now plans to offer 14-day term repo operations twice a week through April 9 of at least $45 billion. It will also conduct three one-month actions of at least $50 billion beginning Thursday. The bank also boosted its overnight offering to $175 billion daily through April 13.

The Fed has been conducting repo offerings and Treasury-bill purchases in a bid to keep control of short-term rates and bolster bank reserves. The efforts have calmed markets since September, when overnight repo rates soared as high as 10%, and also helped quell concern about a potential cash crunch at the end of 2019.

The overnight rate was around 1.21% Wednesday afternoon, within the Fed’s target range of 1% to 1.25%.

(Adds strategist comment, updates throughout.)

--With assistance from Edward Bolingbroke.

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

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