Repo demand has grown this month amid rising market volatility and uncertainty over economic disruptions from the coronavirus epidemic.
Photo: amr abdallah dalsh/ReutersThe Federal Reserve Bank of New York said Monday it will increase the amount of very short-term loans it has been offering to money markets amid a widening market rout.
The Fed had been slowly reducing its lending in a key short-term financing market for repurchase, or repo, agreements, in which the Fed lends cash overnight or for two weeks, accepting government bonds or mortgage-backed securities as collateral.
Monday’s announcement, however, reflects how growing funding strains resulting from the spreading coronavirus epidemic and increased demand for short-term lending have put any reduction in repo lending on hold for now.
Monday’s adjustments were designed to ensure that the supply of bank deposits held at the Fed, called reserves, “remains ample and to mitigate the risk of money market pressures that could adversely affect policy implementation,” the New York Fed said. “They should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus.”
The New York Fed said it would increase to $150 billion from $100 billion the amount of repo lending it conducts on an overnight basis through Thursday, when the Fed is set to update its monthly funding schedule. On two days last week, the Fed saw demand for those overnight repo operations exceed the $100 billion limit, though rates didn’t rise significantly.
The central bank also said it would increase to $45 billion from $20 billion two separate two-week repo lending operations set to occur this week.
Together, the increases will allow the Fed to offer up to $285 billion in repo lending by the end of the week, versus $180 billion had the prior caps remained in place. The Fed had $179.6 billion in repo lending outstanding on Friday.
Repo demand has grown this month amid rising market volatility and uncertainty over economic disruptions from the coronavirus epidemic. Repo lending had been steadily declining before the recent spike in volatility, with outstanding loans from the Fed falling to a five-month low of $126.2 billion on Feb. 28.
The Fed began intervening in repo markets in September after funding stresses suggested a shortage of bank deposits held at the Fed, known as reserves, had caused repo rates to soar, briefly pushing the Fed’s benchmark rate outside of its target range. It increased those operations through the end of 2019 to prevent a year-end regulatory constraint from increasing those strains.
Write to Nick Timiraos at nick.timiraos@wsj.com
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