Fed Plans More Treasury Purchase To Control Lending Rates

Cornelia Mascio
Ottobre 12, 2019

Risk trades are at the best levels of the day.

Overnight repo operations will occur daily, initially at an offering amount of at least $75B per operation.

The New York Fed's Open Market Trading Desk plans to buy Treasury bills at an initial pace of ~$60B per month starting from mid-October to mid-November.

Meanwhile, following Federal Reserve's Thursday's (October 10th) decision to ease liquidity requirements for domestic and foreign banks, several analysts were quoted saying that the move would likely to free up funds for local lenders likes of US Bancorp, PNG Financial, Capital One and others, while Fed's latest move would also reduce compliance burden of the banking sector in the United States.

Some investors said Friday's announcement is a sign that the Fed is willing to act as needed to stabilize short-term interest rates. Through that approach, the Fed sets monetary policy by controlling the interest rate charged on reserves instead of conducting daily market operations. According to the Bloomberg report, the Fed said the bill purchases would aim to maintain bank reserves in the system at or above the level that prevailed in early September 2019. But some strategists say the right level of reserves is between $1.6 trillion and $1.8 trillion.

Earlier this week, Jerome Powell indicated that the Fed would start to expand its balance sheet but insisted the policy should not be considered a new phase of quantitative easing because it was not aimed at generally loosening the stance of monetary policy or boosting economic growth. The Committee will continue to monitor money market developments as it assesses the level of reserves most consistent with efficient and effective policy implementation. The curve had been mostly inverted since May 22 before moving into positive territory on Friday.

Across maturities, yields dipped modestly, but remained up between 5 and 10 basis points on the day.

"The dramatic increase in Treasury issuance takes liquidity out of the system", Kaplan said at the Commonwealth Club.

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