Fed Repurchases Debt Amid Overnight Rate Jump

The repo operation, the Fed's first since the Great Recession, came after the benchmark federal funds rate rose to the top of its target range.
Matthew HellerSeptember 17, 2019

Fed Chair Jerome Powell

In its first such move since the Great Recession, the U.S. Federal Reserve intervened in the funding markets on Tuesday after the benchmark federal funds rate jumped to the top of its target range.

The Fed conducted a repurchase operation involving $53 billion worth of debt instruments, including Treasury bonds and mortgage-backed securities, amid concerns that it was losing control of the benchmark rate.

During a turbulent day for the bond markets on Monday, the overnight repurchase, or repo, rate surged to as high as 8.5%, reflecting a shortage of dollars, while the federal funds rate jumped to the top end of the current target range of 2% to 2.25%.

“It’s certainly a good start,” Lou Crandall, chief economist at Wrightson ICAP, said of the Fed’s first repo operation since it changed its policy-setting approach during the Great Recession.

According to The New York Times, the “intervention is symbolically important. The central bank decided just this year to keep its balance sheet large enough that it can set its policy rate without active market operations. But this episode suggests that it may not have kept its holdings big enough for that approach to work amid more extreme market conditions.”

On Tuesday, the Treasurys and MBS, which constitute the bulk of the Fed’s balance sheet, had low yields of 2.1% each, within the Fed’s target range.

Monday’s repo surge was also fueled by companies withdrawing cash from money markets to pay their taxes shortly after the U.S. Treasury issued a raft of new bonds. “It’s pretty serious — not an existential financial system crisis, but it’s pretty serious,” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, told CNBC.

Market experts suggested the Fed may need to restart its controversial quantitative easing program, and possibly make other adjustments, in the wake of Monday’s market disruption.

“It underlines our view that the Fed has reduced the level of reserves enough/too much and will need to start growing its balance sheet again soon,” said Krishna Guha, head of global policy and central banking strategy at Evercore ISI.

Photo by Mark Wilson/Getty Images