The Federal Reserve conducted a buyback operation involving various $ 53 billion in debt on Tuesday as it seeks to control its base rate.
Wall Street was on Tuesday with talk of a collapse in funding markets that could force the Fed to restart its controversial quantitative easing program and possibly make other adjustments.
The "repo" move comes a day after market turmoil at which rates jumped to record levels and worried that the Fed was losing control of its benchmark rate.
The repo market "broke" on Monday, as the jump in the Fed's overnight interest rate to the top of the 2% to 2.25% target raises questions about the Fed's ability to control money markets, Mark [1
The duration of the operation was to be short – from only 9:30 to 9:45 on Tuesday morning. It was unclear when the New York federation would try to restart the program.
"It's certainly a good start," says Lou Crandall, chief economist at Wrightson ICAP.
The jump in the repo rate has taken place amid concerns over dollar financing, which is critical to the operation of short-term operations. According to various sources, corporate tax payments due on September 15 are a source of some of the market problems.
Market experts have indicated that, in addition to Tuesday's operations, which should curb market disruptions in the short term, the Fed will need to explore additional avenues that could include more quantitative easing just a month after the central bank stopped reducing your balance.
There was a sentiment that, although the Fed was willing to allow bank reserves to remain high, it may have to re-extend its balance sheet to provide banks with more reserves.
"There are probably a bunch of technical factors here, but that underlines our view that the Fed has lowered / restored the reserve level sufficiently and will have to start growing its balance sheet soon, potentially adding to open market operations and eventually it will set up a repo mechanism to ensure that the funding markets are stopped when funding is pressured. Res is too much, "said Krishna Guha, head of global policy and central banking at Evercore ISI.
Guha said that the jump of the river EPO has caused "material disruption" to markets and said it said the Fed would announce this week that it would start increasing its balance sheet by up to $ 14 billion per month. The Federal Open Market Committee for Policy is closing its two-day meeting on Wednesday amid market expectations for another 25 basis points, reduced by the basic overnight loan rate.
However, the committee may also be prompted to lower the interest rate it pays in excess. IOER is used as a lever to control the percentage of funds under control, but sometimes moves below the benchmark.
To be sure, strategists in Wales Fargo have said that such disturbances occur at the end of months, quarters and years, although it is unusual to see one in the middle of the month.
"However, we do not consider this to be indicative of the stress of financing among banks. Although it may be temporary or unstable, it may still be a red flag for an unusual event that investors should keep in mind in the short term, "says analyst James Stracker in a note.