By Michael S. Derby
The Federal Reserve Bank of New York intervened in financial markets Friday with a $55.3 billion weekend repurchase agreement, or repo, adding to the temporary amount of liquidity the central bank has pumped into the financial system.
The repo operation took in $28.5 billion in U.S. Treasurys and $26.8 billion in mortgage bonds. Given longer-term repos already in place and operations from Thursday that were expiring, total temporary liquidity rose by $11.2 billion to $187.3 billion in outstanding repo operations.
Fed repo interventions take in Treasurys, agency and mortgage bonds from eligible banks in what is effectively a short-term loan of central-bank cash, collateralized by the securities. The banks tapping this cash are limited in the amount of liquidity they can take in exchange for their securities, and they pay interest to the central bank to get the funds.
Fed money-market interventions aim to keep the federal-funds rate within the central bank's 1.5%-to-1.75% target range and limit the volatility of other money-market rates.
The Fed restarted its repo operations in September after a decadelong break in the wake of unexpected money market volatility. Demand for Fed money has waxed and waned, and by and large the Fed has restored calm to markets and kept short-term rates where the Fed wants.
The Fed sets the federal-funds rate to influence the overall cost of borrowing, as part of its effort to achieve the inflation and job goals set out for it by Congress. The Fed has used repo operations for decades to influence short-term rate settings.
The central bank said on Thursday that as of Wednesday its balance sheet stood at $4.15 trillion, down $29.9 billion from the week before. Fed holdings were at $3.8 trillion in September and peak Fed holdings were $4.5 trillion in the wake of the financial crisis. About $186.1 billion in repos were outstanding on Wednesday.
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