(Reuters) – New York Federal Reserve will continue to increase money market liquidity into November, the bank announced Friday.
Security Guards Stand Outside the Federal Reserve Bank of New York in Manhattan District of New York City, New York, USA, October 4, 201
The Bank Will Offer Daily Repurchase Agreement, or Repo, Operations, and Offer at least $ 75 billion a day in daily cash injections through November 4. The Fed also announced forward references for companies that want to borrow money longer, and most deals last for two weeks. This expands a policy that was originally due to end next week.
The continuation of the daily repo activity ensures that financial institutions will be able to approach the central bank to borrow cash for at least the next Fed meeting, as policy makers are expected to discuss a more permanent solution.
The New York Fed began holding daily repo operations on September 17, after a key borrowing rate in overnight lending markets for cash peaked at 10%. The central bank succeeded in calming markets through the operations, but some investors and former Fed officials have asked the central bank to provide a long-term solution.
Some investors say that the Fed should permanently increase the liquidity of the banking system by expanding the size of the balance sheet or introducing a standing repo facility, which will allow firms to borrow cash as needed at a fixed rate.
Shahid Ladha, head of G10 strategy for America's BNP Paribas strategy, called the expansion of repo operations a "positive" move, but said a structural change is needed. He estimates that the Fed needs to raise its reserves by nearly $ 400 billion next year to avoid scarcity problems.
"It is encouraging, but again this is a temporary liquidity operation," Ladha said. "It's still not enough."
Federal Reserve Deputy Richard Clarida said Thursday that officials would revisit the possibility of establishing a standing repo facility, which was discussed at the June meeting, at future meetings. Clarida also said officials would discuss in October whether it is time to grow the Fed's balance sheet.
The New York Fed advance action could help minimize market volatility in the short term because companies now know that they can turn to the central bank if they need liquidity, said Blake Gwinn, head of NatWest Markets' front-end strategy. "It is a complete lean to provide repo liquidity through these temporary operations," he said.
Gwinn continued to say that a more dramatic intervention may be necessary to ensure that there are no major fluctuations in the reporters during the year. This is when banks can regulate reserves for regulatory reasons, and a deadline for quarterly tax payments can create fresh liquidity problems.
Gwinn said that a small movement in the repo rate may not be a problem, but as long as a repeat of the 10% rate seen last month is avoided.
"Before the crisis, we had repo volatility," he said. "It wasn't unknown, and it wasn't scary. People coped with it."
Reporting by Jonnelle Marte; Editing by Chizu Nomiyama and Tom Brown