Announcements 

The Fed Injects Into Repo Markets

Oct 08, 2019
The Fed Injects Into Repo Markets

The Federal Reserve recently took action that it has not taken for a decade since the Great Financial Crisis. In two separate instances, the New York Fed injected money into the banking system through an overnight repurchase agreement, or repo. The injection is designed to assist the Fed in keeping interest rates under control and the Fed Funds rate within the desired range.

According to businessinsider.com, short-term interest rates had spiked up to as high as 10 percent, threatening to put a major monkey wrench into the bond market and the lending system. An initial injection of $53 billion by the New York Fed did not do much to lower borrowing costs, so the central bank elected to inject another $75 billion the following day.

The reason behind the lack of cash on hand for short-term lending by banks is the subject of some debate. A liquidity squeeze is typically the result of investors’ unwillingness to lend money (as was seen during the financial crisis) or if there is not enough cash in bank reserves to be lent out. The latter was the cause for the recent spike in short-term lending rates, and the shortage did coincide with tax bill time and the issuance of billions in new bonds by the Treasury Department.

Higher volatility in the $2 trillion repo market may be due to the widening gap between Federal revenues and expenditures. The U.S. deficit is at the highest level in years, and a further increase in the deficit could fuel further volatility and the need for more intervention.

The Fed has not only injected money into the banking system, but it recently cut the Fed Funds rate by another 25-basis points. The central bank appears to be looking to stay ahead of the curve as the global downturn continues, and further rate cuts may prove necessary if the data suggests an acceleration of the slowdown.

There is growing debate, however, about the necessity of further rate cuts and the economic outlook. President Trump has been very vocal about his desire for lower rates, but the Fed has thus far been reluctant to take a more aggressive approach to easing. Despite some recent bumps and the ongoing trade war, the labor market and overall economy continues to be robust, and the need for further central bank measures may dissipate if an agreement on trade is reached.

Markets are pricing in another rate cut by the Fed this month, and from there the central bank will likely take a wait and see approach that is data dependent.

Sign up for Straits Financial’s bi-weekly newsletter here to get the latest market news directly to your inbox.

DISCLAIMER: This document is issued for information purposes only. This document is not intended, and should not under any circumstances to be construed as an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document. Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Trading commodity futures and options products presents a high degree of risk, and losses in excess of your initial investment may occur. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice.  The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.