by SignalFactory · February 14, 2020 | 09:29:55 UTC
Today there are no trading signals due to the Uncertainty in the repo market
The
Federal Reserve is accelerating the pace of its withdrawal from short-term
funding markets, even as investors’ demand for the central bank’s cash remains
elevated.
The
New York arm of the Fed announced on Thursday that it will further cut the size
of its interventions in the repo market, where investors exchange high-quality
collateral such as Treasuries for cash. It is the latest step in its attempt to
wean investors off the funding it has provided since short-term borrowing costs
spiked in September.
The
new plan reduces the maximum amount the Fed will lend overnight each day from
$120bn to $100bn — a change that will kick in on Friday. Moreover, the Fed will
limit the amount it will lend in the form of two-week loans to $25bn as of
Tuesday, from its current $30bn offering, and pare that amount even further in
early March. At that point, the Fed will lend a maximum of $20bn on a two-week
basis.
Analysts
were primed for the shift, thanks to numerous reminders from chairman Jay
Powell and other Fed officials in recent weeks that the central bank seeks to
gradually transition away from active interventions in the repo market. The
reductions were somewhat sharper than some had expected, however.
Mr. Powell said this week in testimony to Congress that he expects the number of bank reserves — or cash held at the central bank — to return later this year to a level sufficient to avoid a repeat of September’s cash crunch. It is widely thought that the repo market went haywire five months ago because reserves had dropped too low and banks were holding back from short-term lending.
The
Fed has been buying $60bn of short-dated Treasury bills each month to increase
the amount of cash in the system, and therefore reserves. Banks currently hold
$1.58tn in reserves at the Fed — up from $1.3tn in September.
“The optics are good,” said Lou Crandall, chief economist at
Wrightson Icecap, of the new schedule of Fed lending activity, which he said
represented a suitable pace for scaling back intervention.
Demand
for the Fed’s cash remains high, however, with the four most recent two-week
loans generating demand roughly two times the $30bn that was on offer. Analysts
have attributed the elevated amount of bids to the fact that the rate at which
the Fed is providing its funding has been relatively low, less than 1.6 percent
on average.
As such, Mr. Crandall said he expects to learn a lot more about the market when the size of the two-week offering drops to $20bn.
This means that if the Fed’s total loan
market stood at $ 175 billion last week, that amount is expected to fall to $
10 billion a week.
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