SUPER PUMP: Fed to Increase Liquidity Available To Markets… Warren Calls on Mnuchin to Explain Turmoil

Fed to Increase Temporary Liquidity Available to Markets

The Federal Reserve Bank of New York is boosting the amount of temporary liquidity it is willing to make available to financial markets starting this week, the bank said on Wednesday.

It said that as of Thursday, the minimum size of its overnight repurchase-agreement, or repo, operations will rise to $120 billion, from what had been at least $75 billion. Longer-term operations will rise from a minimum daily offering size of $35 billion and go up to $45 billion in interventions scheduled for Thursday and Oct. 29. The longer-term repo operations are scheduled to carry over into November.

The Fed said it was raising the minimum operation sizes “to mitigate the risk of money market pressures that could adversely affect policy implementation.”

Fed repo operations add liquidity to financial markets by loaning cash to eligible banks in return for taking in Treasury debt, which effectively functions as collateral for the loans. The Fed restarted large-scale repo operations a month ago when confronted with unexpectedly big swings in money market borrowing rates.

Interest rates spiked ahead of the September Federal Open-Market Committee meeting for a number of factors. Much of it was due to tax payments and Treasury debt settlements. But as part of an effort to tamp down on market volatility, the New York Fed have made large-scale repos a regular occurrence again.

The Fed is seeking to further reduce the prospect of money-market rate volatility with around $60 billion in Treasury bill purchases a month into next year, as part of an effort to grow the size of its nearly $4 trillion balance sheet.

The increased size of the operations announced by the New York Fed Wednesday come as the Federal Open Market Committee is about to meet to deliberate on monetary policy next week. The panel is widely expected to lower rates again by a quarter percentage point next Wednesday. The Fed’s increased liquidity offering could be a bid to further ensure market rates don’t spike again, as they did ahead of the September FOMC meeting.

Elizabeth Warren Asks if Banks are Using Repo Madness to Loosen Liquidity Rules

Senator Elizabeth Warren said in a letter that she is concerned banks could use the ongoing turmoil in overnight funding markets to loosen liquidity rules they have long complained about.

The Federal Reserve has been pumping tens of billions of dollars into the market for overnight and short-term repurchase agreements, or repos, for several weeks. On Tuesday, the Fed swapped $99 billion of cash for securities held by banks.

In a letter addressed to Treasury Secretary Steven Mnuchin, who chairs the Financial Stability Oversight Council, Warren asked the secretary to explain the causes of the market turmoil. She pointed out that many of the early attempts to explain the disruption–including large corporates tax payments due in mid-September–either never made much sense or fail to explain why the market continues to need so much additional liquidity.

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