The Federal Reserve Bank of New York conducted $53.15 billion in repo purchases on Sept. 17 to help add liquidity to short-term funding markets, which experienced significant spikes in rates a day earlier.
Spikes in short-term borrowing rates helped lead to a jump in the Fed's benchmark federal funds rate, which soared to 2.25% on Sept. 16, up from 2.14% on Sept. 13. The fed funds rate remained just within the Fed's target range of 2% to 2.25%, but the New York Fed's overnight repurchase agreement purchases were intended to help bring it closer to the middle of the 25-point range.
With repo transactions, the New York Fed temporarily increases reserves in the banking system, which some analysts and traders have said is experiencing a liquidity crunch due to the Fed's now-halted effort to decrease its roughly $3.8 trillion balance sheet.
The quantitative tightening effort led to declines in bank reserves. Although the process has now stopped, bank reserves are expected to keep declining due to continued growth in other Fed liabilities, such as demand for U.S. currency and the Treasury Department's deposit account at the Fed. Growth in those liabilities eat into bank reserves since, for example, customers pull money out of U.S. banks if they want cash.
The New York Fed repo purchases, which had a limit of up to $75 billion, took place in the morning and were conducted with only primary dealers.
The purchases came as Fed officials were gathering for their Sept. 17-18 Federal Open Market Committee meeting, which will likely conclude with another 25-basis-point cut to the benchmark rate. In the past, the Fed has addressed jumps in its benchmark rate by making a technical tweak to the interest rate it pays on the excess reserves banks hold at the Fed.
Analysts say officials may do so again at the meeting, but the Fed may also weigh other options, such as a potential standing repo facility. That facility would be partly aimed at reducing banks' demand for reserves, which is significantly higher than before the financial crisis.
