Wall Street’s worst fears of a year-end investment squeeze never materialized thanks mainly to the quarter-trillion dollars the Federal Reserve stuffed into the market to ensure nothing turned gummed up.
The question now, although, is what it will take for the U.S. central bank to withdraw from its daily liquidity operations in the $2.2 trillion market for repurchase agreements, or repos – after it became a dominant participant in a short three months.
The New York Fed started putting billions of dollars of liquidity into the repo market in mid-September when a confluence of occasions sent the price of overnight loans as high as 10%, over four times the Fed’s rate at the time. A month later, the Fed moved to develop its balance sheet – and increase the level of reserves – by snapping up $60 billion per month in U.S. Treasury payments.
The Fed will continue making tens of billions a day into the repo market through at the least the end of January.
Its capacity to exit from the repo market after that time will rely upon how long it takes the central financial institution to make the balance sheet massive enough so there are ample reserves in the banking system – and the repo activities are no longer needed.
Minutes from the Fed’s December policy assembly released Friday confirmed its staffers anticipated repo activities to be “gradually” reduced after mid-January.
Nevertheless, staff members additionally stated the central bank might have to continue offering some repo activities until at least April when tax funds might scale back the level of reserves.