The Federal Reserve made crystal clear that it doesn’t want U.S. money market rates to surge again like they did early this week, announcing it will — for the third day in a row — inject cash into this vital corner of finance.
On Thursday, the New York Fed will offer as much as $75 billion in a so-called overnight repurchase agreement operation, adding another dose of temporary liquidity to restore order in the banking system. It made the same offer Tuesday and Wednesday. This latest action will follow the Fed’s reduction in something called the interest rate on excess reserves, another attempt to quell money-market stresses.
The prior operations have calmed markets, with repo rates declining Wednesday to more normal levels after jumping to 10% on Tuesday, four times last week’s levels. The surge doesn’t necessarily mean credit markets are seizing up or a financial calamity is imminent, but it could hamper the Fed’s ability to steer the economy.
Fed Chairman Jerome H. Powell said Wednesday, after policymakers wrapped up a two-day meeting, that the central bank will keep doing these repo operations if needed to get markets back on track. He spoke hours after the effective fed funds rate busted through the central bank’s cap, evidence Powell and his colleagues were losing their grip on one of their most important levers for controlling the financial system.
To keep things calm, “the Fed is going to have to keep coming in and doing these operations daily,” said Scott Buchta, head of fixed-income strategy at Brean Capital. “Powell kind of minimized the issues of this week at the press conference, but overall the Fed probably did the best they could do for now to address this. But they will likely need to take more action ahead or at least discuss those plans further at their October meeting.”
Powell also said the Fed would provide a sufficient supply of bank reserves so that frequent operations like the ones they’ve done this week aren’t required.