Credit & Capital

Fed Ready for More Funding Markets Interventions

“For the foreseeable future, we’re going to be looking at doing the sorts of things we did the last two days," Fed Chair Jerome Powell says.
Matthew HellerSeptember 19, 2019

Federal Reserve Chair Jerome Powell has indicated the central bank will continue to repurchase debt to inject liquidity into the funding markets but left open how it will address the problem of a scarcity of bank reserves.

The Fed was scheduled Thursday to conduct its third repo operation of the week amid turmoil in the funding markets that briefly pushed overnight bank-to-bank lending rates above the Fed’s target range.

“For the foreseeable future, we’re going to be looking at it, if needed, doing the sorts of things we did the last two days,” Powell said Wednesday after the Fed announced a quarter-point rate cut.

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In moves to maintain control of the benchmark federal funds rate, the Fed also lowered the interest it pays on excess bank reserves to 1.8% on Wednesday and set its offering rate for any emergency repo operations at 1.70%, five basis points below the bottom of the new federal funds target range of 1.75% to 2%.

But as Reuters reports, the Fed did not “address what some analysts say is the underlying problem — a scarcity of bank reserves that can only be addressed if the Fed again expands its portfolio of bond holdings.”

The Fed’s balance sheet, consisting largely of its holdings of Treasuries and mortgage-backed securities, peaked at about $4.25 trillion in 2015 and 2016 before the Fed began shrinking it as the economy improved. It stood at about $3.7 trillion on Sept. 11.

Powell said the Fed would be closely monitoring the level of reserves in the system. “It is certainly possible that we will need to resume the organic growth of the balance sheet earlier than we thought,” he said.

Ralph Axel, rates strategist at Bank of America Merrill Lynch, said the market will be looking for the Fed to provide a permanent fix, particularly with “another potential hot spot for funding rates” looming at the end of the quarter on Sept. 30.

“It’s a big issue to make sure they control rates on Sept. 30 to make sure they stay within their band,” he told CNBC.