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Comment: In accordance with March 3 FOMC directive, New York Fed increases size of repurchase operations

Before market open on  Monday, March 9, the New York Fed announced it would increase the size of its repurchase operations. The statement said, “Beginning with today’s operation and through March 12, 2020, the Desk will increase the amount offered in daily overnight repo operations from at least $100 billion to at least $150 billion. In addition, the Desk will increase the amount offered in the two-week term repo operations on Tuesday, March 10, 2020 and Thursday, March 12, 2020 from at least $20 billion to at least $45 billion.”

The action was in accordance with the Implementation Note from March 3 that accompanied the announcement of the cut in short-term rates by the FOMC. The note said, “The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations at least through April 2020 to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation.”

Given the news about plunging oil prices and market declines overseas before markets open in the US, the New York Fed is acting to reassure markets that the Fed will indeed ensure ample liquidity to meet whatever needs may arise as investors seek safe havens.

Additionally, this will raise expectations that the FOMC’s intention of ramping down purchases of Treasury bills in April will have to give way to the need for maintaining a larger balance sheet during a period of volatility. The FOMC directive was “at least” into the second quarter, so it does not require a fresh directive to extend the buys. While the buying of bills was — and is — a technical move to adjust the size of the balance sheet to an appropriate size, it will raise the specter that the FOMC is going to revive the large scale asset purchase program — so-called “QE” — in some form to help support the economy as it navigates the setbacks and unknowns associated with the spread of COVID-19.

The FOMC meeting minutes have indicated that the review of monetary policy has policymakers anticipating that unconventional measures could be invoked sooner and more aggressively in the event of a downturn. This may get put into action before the review is finalized around mid-year. The 50 basis point cut in the fed funds target range as of March 3 may be followed by a revival of forward guidance and purchases Treasury notes and bonds and/or other high quality debt sooner rather than later.

See the Whetstone Analysis Reference Library for history of previous asset purchases and balance sheet developments, and rate history that includes previous developments with forward guidance.

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