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The Federal Reserve ramped up the amount of cash it’s prepared to inject into funding markets over the next month, promising a cumulative total above US$5 trillion, in a signal that officials will do whatever it takes to keep short-term financing rates from spiking.
In the third upsizing of its repo schedule this week, the Fed’s New York branch on Thursday offered US$500 billion in a three-month repo operation amid signs that the financial impact of the coronavirus outbreak was starting to strain borrowing markets as well as trading in U.S. Treasuries. The bank will repeat that exercise Friday along with a US$500 billion one-month operation, and it plans to offer that amount on 10 occasions in total in the next month.
Add it all up and throw in the shorter repo maturities the Fed has scheduled, and the sum will reach US$5.4 trillion. The promise of increased injections came as stocks plunged anew Thursday and on signs of a dash for cash by companies, which is putting extra strain on global funding markets.
“The Fed just brought an aircraft carrier to a knife fight,” said Gennadiy Goldberg, a senior U.S. Rate strategist at TD Securities. “That’s the scale of repo on offer.”
As turmoil in financial markets continued unabated this week, with Treasury yields sinking to unprecedented levels and U.S. equities tumbling into a bear market, the Fed responded by unexpectedly boosting the sizes of the overnight and term actions on Monday and making additional increases Wednesday.
At that point, the amount of cash it said it was pledging was as much as US$505 billion as it worked to keep short-term funding markets functioning smoothly over quarter-end. In comparison, it offered injections of US$490 billion over year-end 2019, the previous period when the market faced down a potential cash crunch.
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%. The Fed also said on Thursday that it would expand its buying beyond T-bills.
“It is clear that the Fed learned an important lesson from the blow-up in funding markets in September ... act fast and act big, and most big problems will be avoided,” Jefferies economists Thomas Simons and Ward McCarthy wrote in a note to clients.
On Thursday, primary dealers submitted US$78.4 billion of bids for the three-month operation, less than the maximum of US$500 billion, with some banks potentially satiated already after the Fed’s addition of almost $200 billion of liquidity via term and overnight operations earlier in the day.
The Fed’s efforts appeared to be working. By late afternoon, overnight repo rates had dropped to the bottom half the Fed’s target range for the effective fed funds rate -- currently 1% to 1.25% -- after edging above it in the morning.
“The Fed will do what’s necessary to keep the funding markets functional and is very much aware of the liquidity-impaired environment in Treasuries,” said Credit Suisse strategist Jonathan Cohn. “The US$1 trillion in combined 1- and 3-month repo effectively means uncapped, and markets have responded accordingly.”