Fed Boosts Amount of Liquidity Offered to Financial System

The Fed’s expanded offerings of liquidity to the financial system saw strong demand Thursday from eligible banks.

The Federal Reserve Bank of New York intervened twice Thursday morning with what is called an overnight repurchase-agreement operation and via a 14-day repo operation.The New York Fed had said Wednesdayit was raising its minimum offerings for overnight repos to $120 billion from a minimum of $75 billion, with the next two-term repo operation increased to $45 billion from a minimum of $35 billion.

The repo market shook the financial world in September when an unexpected rate spike choked short-term lending, spurring the Federal Reserve to intervene. WSJ explains how this critical, but murky part of the financial system works, and why some banks say the crunch could have been prevented. Illustration: Jacob Reynolds for The Wall Street Journal

The Thursday term repo saw dealers submit $62.15 billion in securities and the Fed take in $45 billion in Treasurys, agency and mortgage securities. The overnight operation was also well bid, with dealers offering and the Fed taking $89.154 billion in securities. TheThursday overnight repo operationwas much bigger than the one-day operation Wednesday, wherethe Fed added $49.845 billionin one-day liquidity.

Fed repo interventions take in Treasury and mortgage securities from eligible banks in what is effectively a loan of central bank cash, collateralized by dealer-owned bonds. The bill purchases permanently add reserves to the financial system and are seen as a more-enduring fix for potential market volatility.

The expansion of temporary liquidity comes as the Fed is about to meet in a policy gathering next week that is likely to result in a cut in short-term rates. It is also month’s end, when short-term rates often face pressure as banks and companies sort out their financial liquidity needs.

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