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Powell’s Repo Remedy Leaves Money Markets Clamoring for Details

Alexandra Harris and Emily Barrett

(Bloomberg) -- Federal Reserve Chairman Jerome Powell has outlined a plan for boosting the level of bank reserves in the system, but some observers doubt that it will be enough to shore up funding markets.

Powell said Tuesday that the central bank will resume purchases of Treasury securities in an effort to avoid a repeat of money-market turmoil that last month saw rates spike on repurchase agreements and the fed funds rate drift outside policy makers’ target range.

The measures, according to Powell, are not a return crisis-era quantitative easing programs. He said they relate to the recent “technical issues” and suggested they would be made up of Treasury bills. Questions remain, however, including just how big the purchases might be.

“The devil is in the detail,” said Societe Generale interest-rate strategist Subadra Rajappa. “The question now to me is one of size, how much are they going to need to do and over what period of time.”

Societe Generale estimates the purchases could be anywhere between $200 billion and $400 billion and that if it’s toward the high end of that range it might be difficult to do it all with bills.

Powell’s announcement on Tuesday comes a day before the release of minutes of the Fed’s most recent policy meeting. That gathering took place in the midst of last month’s money-market disturbances and came around the same time that the New York Fed began ad hoc liquidity injections that are ongoing.

Tuesday’s comments also come ahead of the Federal Open Market Committee’s next policy meeting on Oct. 29 and 30. Some market watchers had been hoping that officials might use that gathering to outline a more permanent plan to address the volatility in overnight funding markets. While Powell has provided some guidance, though, uncertainty continues to swirl over the future of the central bank’s toolkit and balance sheet.

The following is a selection of other views from market observers on the resumption of asset purchases.

Jefferies (Thomas Simons)The question is “how many bills can they buy between Oct. 30 and the end of December in order to relieve the pressure,” he said, noting that he was skeptical they could do enough in that time frameSimons sees the Fed buying T-bills at a “relatively modest pace” and simultaneously continuing temporary open market operationsBy undertaking these steps to control monetary policy transmission, “they’re creating more work for themselves”BMO Capital Markets (Jon Hill)Questions about a standing repo facility remain because the Fed needs to continue to do open market operations, but the question is “what form of a repo facility is it”Even if the Fed bought $300 billion of Treasuries over the next six months, that’s still only building the reserve buffer by $50 billion a month and that “isn’t quick enough”Powell’s speech “was a little bit unclear” and “we’ll be looking at the minutes to see exactly what the Fed will be buying”FTN Capital Markets (Jim Vogel)Fed’s commitment to regrow its balance sheet will allay investors’ concerns that the central bank might drag its feet rebuilding a liquidity buffer for the financial systemThe Fed’s plans to buy more bills should take the pressure off the Treasury Department at a time when the market was clearly having trouble digesting the slew of supply“Fed purchases of bills increase sale and auction size flexibility” for the federal governmentNatWest Markets (Blake Gwinn)Fed’s plan to potentially buy T-bills may help mitigate stress in the funding markets, but there’s still a chance of repo volatility at year-end“Unless the Fed is planning on doing $300 billion of bill purchases, we’ll still see spikes in December”It does however eliminate “the risk of a September-type scenario”When general collateral repo spiked above 6% at the end of 2018, “reserve balances were higher at year-end and we still got stress that wasn’t exactly expected. Even with higher reserve levels, liquidity wasn’t getting from point A to point B”

--With assistance from Debarati Roy and Nick Baker.

To contact the reporters on this story: Alexandra Harris in New York at aharris48@bloomberg.net;Emily Barrett in New York at ebarrett25@bloomberg.net

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

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