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New York Fed extending daily repo operations into November


THE New York Federal Reserve will continue to boost liquidity in money markets into November, the bank announced on Friday.

The bank will offer daily repurchase agreement, or repo, operations, offering at least US$75 billion a day in daily cash injections through Nov 4. The Fed also announced term repos for firms wanting to borrow cash for longer, with most offerings lasting two weeks. This extends a policy that was initially supposed to end this week.

The continuation of the daily repo operations ensures that financial firms will be able to turn to the central bank to borrow cash until at least the next Fed meeting, when policymakers are expected to discuss a more permanent solution.

The New York Fed began holding daily repo operations on Sept 17, after a key borrowing rate in overnight lending markets for cash spiked to 10 per cent. The central bank succeeded in calming markets through the operations, but some investors and former Fed officials have been calling on the central bank to deliver a long-term fix.

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Some investors say the Fed should permanently increase liquidity in the banking system by expanding the size of the balance sheet or introducing a standing repo facility, which would allow firms to borrow cash as needed at a fixed rate.

Shahid Ladha, head of strategy for G10 Rates Americas at BNP Paribas, called the extension of the repo operations a "positive" move, but said a structural change is needed. He estimates that the Fed needs to increase reserves by close to US$400 billion over the next year to avoid scarcity issues.

"It's encouraging, but again this remains a temporary liquidity operation," Mr Ladha said. "It's still not enough."

Federal Reserve vice-chairman Richard Clarida said on Thursday that officials would revisit the possibility of creating a standing repo facility, which was discussed in the June meeting, during future meetings. Mr Clarida also said officials would be discussing in October whether it is time to grow the Fed's balance sheet.

The pre-emptive action from the New York Fed could help minimise market volatility in the near term because firms now know they can turn to the central bank if they need liquidity, said Blake Gwinn, head of front-end rates strategy for NatWest Markets. "It's a full fledged lean into providing repo liquidity through these temporary operations," he said.

Still, Mr Gwinn said a more dramatic intervention might be needed to ensure there are no wide swings in repo rates near the end of the year. That is when banks may adjust their reserves for regulatory reasons, and a deadline for quarterly tax payments could create fresh liquidity problems.

Mr Gwinn said a little movement in repo rates might not be problematic, however, as long as a repeat of the 10 per cent rate seen last month is avoided. "Before the crisis we had repo volatility," he said. "It wasn't unknown and it wasn't scary. People dealt with it." REUTERS

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