The Federal Reserve Bank of New York announced plans to conduct repurchase agreement operations through until at least February13, although the size of term operations will be trimmed to $30 billion from the start of next month. The central bank did not elaborate on plans beyond that.
The move extends a programme that has been in place since it stepped in to combat funding-market turmoil in September, but indicates the central bank may have one eye on the exit.
It announced plans to conduct a series of term repo operations from January 16 through January 30 of $35 billion apiece, in line with the most recent similar actions. Those scheduled from February 4 to February 13 will have a maximum offering size of $30 billion. The newly scheduled operations will provide liquidity through to February 27.
The maximum size of the central bank’s daily overnight operations, meanwhile, will be kept steady at $120 billion. These are slated to continue until February 13, according to the New York Fed.
“This is consistent with our assumption that the Fed will back off slowly and make sure not to rock the funding boat,” said BMO rate strategist Jon Hill.
The Fed has been conducting repo offerings and Treasury-bill purchases in a bid to keep control of short-term interest rates and bolster bank reserves. That has calmed markets since the September spike that took overnight repo rates as high as 10% and helped to quell concerns about a potential cash crunch at the end of December 2019.
In the minutes from December Federal Open Market Committee released last week, Lorie Logan, manager, of the System Open Market Account, said January’s calendar could reflect a “gradual reduction” in offerings, though indicated that some repos might be needed at least through April, when tax payments will reduce reserve levels.
“We had thought the Fed would proceed in a very gradual manner in which they’re trying to do no harm and that’s exactly what they’re doing,” said Mark Cabana, head of US interest rate strategy at Bank of America. He also raised the possibility that the Fed might tweak its interest on excess reserves rate, which could have knock-on effects for repo operation rates and usage.
Some in the market have already been speculating about the possibility of a move in IOER, one of the tools that the central bank uses to help control its main benchmark, the fed funds rate. The effective fed funds rate, which the Fed focuses on to implement monetary policy, has moved closer to the lower bound of its target range, increasing the prospect that the central bank will adjust IOER.
If the central bank opts to raise IOER, that should also lift the rate on the repo operations as well, according to Cabana.
The Fed also announced Tuesday that it planned to keep unchanged the pace of Treasury purchases it conducts. The central bank will buy $60 billion a month of Treasury bills for reserve management and $20 billion a month of Treasuries of various types for reinvestment purchases, according to the New York branch’s website.