Fed chair Jerome Powell says the central bank will keep up repo operations if that is what it takes to get markets back on trackFederal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting on September 18, 2019 in Washington, DC. Picture: CHEN MENGTONG / CHINA NEWS / VCG via GETTY IMAGES
The latest addition of liquidity — with the Fed making clear it is ready to do more as needed — follows the federal open market committee’s move on Wednesday to reduce the interest rate on excess reserves, or IOER, by more than their main interest rate — all attempts to quell money-market stresses. Given the added supply, banks’ holdings of Treasuries have risen and are increasingly being financed by money market funds investing in repo, which leaves “US funding markets more fragile”, Schneider wrote. He said this adds to other reasons why the Fed needs to do more to engineer a long-term fix.
The only way “to permanently alleviate the funding stress is to rebuild the buffer of reserves in the system”, according to Morgan Stanley strategist Matthew Hornbach. One idea that has attracted a fair amount of attention is something called a standing fixed-rate repo facility — a permanent way to ease funding pressures, as opposed to the ad-hoc operations the Fed has used this week. Many analysts even predicted a Wednesday announcement that the Fed would start expanding its balance sheet.
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