Politics & Money

Fed increases liquidity in financial markets

Repo operation offerings to rise to $120 billion

The Federal Reserve will now be increasing its liquidity injections in the overnight lending markets.

Instead of its current $75 billion, repo operation offerings will increase to $120 billion as the central bank works to keep markets operating within its target range, according to an article by Jeff Cox for CNBC.

The New York Fed announced the increased liquidity offering, but did not elaborate on its reasons for the increase, the article states.

From the article:

“It’s just more evidence the Fed will not back off as year-end gets closer,” said Mike Schumacher, global head of rate strategy at Wells Fargo Securities. “The Fed wants to take out more insurance. You had repo pick up last week. That might not have gone over too well.”

A mid-September cash crunch in the repo, or repurchase, market led the Fed to conduct a series of repo and term repo operations to make sure that banks have the overnight funding they need at rates within the central bank’s intended parameters.

Back in September, repurchase agreement rates spiked from about 2% to more than 10% as some borrowers were pressured by corporate tax payments and settlements of the newly actioned U.S. Treasuries.

This raised concerns for the housing market as these rates have been considered as replacements for the London Interbank Offered Rate, which is set to expire in 2021.

LIBOR, dubbed the world’s most important number, is a scandal-plagued benchmark that undergirds about $350 trillion in loans. LIBOR is a common benchmark for determining short-term interest rates. Adjustable rate mortgages, for example, are often linked to LIBOR.

When borrowers take out an ARM on their home, they lock in a lower interest rate for a set period of time, typically about five years. After that, the interest rate will fluctuate depending on an index like LIBOR.

New options are being presented as replacements, and many think the Federal Reserve Bank of New York’s SOFR may have the best bet of becoming its replacement.

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