The Federal Reserve intervened in the US money markets for the third day in a row on Thursday and promised it would do so on Friday, too, as pressure mounted for the central bank to open a permanent facility to ease pressure on short-term lending.
The New York Fed injected $75bn in overnight cash into the short-term lending market, and its auction was oversubscribed for the second straight day, with banks demanding almost $84bn.
It will repeat the operation on Friday with the same terms at 8.15am local time, it said in a statement on Thursday afternoon.
It activated its repo operation on Tuesday for the first time since 2008, after technical factors sent a pivotal measure of overnight funding costs surging. On Wednesday it ran the operation again as markets remained strained.
The central bank’s policy rate climbed above policymakers’ target on Tuesday and receded back to the very upper end of the targeted range on Wednesday, according to figures published on Thursday — a sign of how tense markets remain, even amid the Fed’s interventions.
Thursday’s third repo auction came a day after the Federal Open Market Committee cut interest rates by 25 basis points, in a move some analysts dubbed a “hawkish cut” as it did not deliver as substantial a policy easing as some investors had anticipated.
Several strategists at major banks that act as trading counterparties for the Fed said the central bank should pump more regular bursts of funding into the system. This is particularly important before the end of financial quarters and years, analysts said, because of the risk of further bouts of cash outflows sparking renewed market dislocations.
Bankers and investors have called for the Fed to launch a “term” repo facility through which it could lend cash for as long as two weeks, to ensure players in the market have the money they need until after the end of the quarter has passed.
“They should walk in on Monday and say they are doing a $100bn, 10-day operation, then we aren’t going to be talking about this after quarter end,” said one banker.
In particular, some bankers have highlighted the end of September, which is typically a more strained time for the repo market as banks pull back and reduce the size of their balance sheets ahead of an important regulatory reporting date on the last day of the July to September quarter.
Bankers and investors said earlier in the week that no one in the market was willing to lend cash until after the end of the quarter.
“Right now there is so much uncertainty,” said Scott Skyrm, a repo trader at Curvature Securities. “No one wants to be the first one to buy something at 2.5 per cent and then they could come in the next day and rates are at 5 per cent.”
Banks are also concerned about the possibility that more cash could ebb from the repo market over the coming week as the US Treasury continues to build its own cash reserves.
And JPMorgan analysts warned this week that the ructions over the past few days may be “a prequel to what could come at year-end when US banks significantly reduce their footprint in the money markets”.