NY Fed Repo Policy over Year End

  • Intensification. On Thursday afternoon, the NY Fed announced the schedule of repo operations for the month ahead (which spans year-end). The changes demonstrate the commitment of policymakers to avert year-end pressures.
    • Overnight. ON repos will be continued to be offered daily. The operation limit remains unchanged at $120 billion, except for the days before (Dec. 31) and after (Jan. 2) New Year’s Day when the limit is increased to $150 billion.
    • Term. Repo operations that last two weeks will still be offered twice per week, of which several straddle year-end. They are also offering a month-long term repo on Monday, Dec. 15., which will be bigger ($50 billion). If the year-end term repos leading up to the end of the month are consistently oversubscribed, the NY Fed will further increase the degree of support.
    • Forward. In addition to the larger overnight and term repos around year-end, the NY Fed will also conduct a one-time repo, of length one-day, to be settled one day forward. This one-day forward settlement operation will be conducted on the morning of Dec. 30 but won’t settled until the next day (Dec. 31) and will mature after year-end (Jan. 2). 
      • Purpose. The point of this operation is to assess, last-minute, how serious the year-end stresses will be, which will allow policymakers to provide extra support to the market if necessary (likely by increasing the overnight operation sizes of Dec. 31 and Jan. 2 from $150 billion to an even larger amount. 
    • Clean-upSome repo market experts expected (on top of the special forward repos and additional term repos) a second overnight repo on the afternoon of Dec. 31 to “clean up” as a possibility. The Fed hasn’t announced such plans, although they might eventually do so.
    • Taking stock. In our view, the best way to assess the degree of liquidity support given is to plot the cumulative amount of operations in stock terms. Since September, the cumulative capacity of such operations has risen consistently and will reach a peak of almost $500 billion around year-end (and to decline to November levels thereafter).
    • After January. The official (and stale) guidance from the FOMC is that repo operations will be offered “at least through January.” It’s quite obvious that the FOMC is unlikely to cease its repo operations by the end of January. But, over time, the reserves added by T-bill purchases will gradually reduce the uptake at repo operations. 
  • It’s all relative. How does this compare to market expectations? 
    • Per op. Apparently, a schedule of term repos below $25 billion would have been a disappointment for the market. So, the per-operation pace didn’t disappoint. 
    • Aggregate. Capacity was expected by some to be only $335 billion over year-end, so the $490 billion announced so far is comfortably above that. 
    • Survey. Their previous survey data showed market participants expected repo capacity to increase in December, but not by this much. But one should not interpret that as meaning that the NY Fed exceeded expectations with their latest plans, as market expectations have likely shifted upward since. The NY Fed will share its December FOMC survey data after the December minutes come out in January.)

  • And what about bill-buying? The NY Fed quietly updated the reserve-management purchases announcement page to indicate that the “initial” pace of $60 billion per month in Treasury bills will, in fact, continue for at least another month. There have been no press releases since the initial announcement to reaffirm the purchase pace, although it seems like the market generally assumes this pace will prevail until further notice. The FOMC almost certainly revisited this decision at least twice since October 11. We assume this pace will remain the same until around Q2. 

  • QE4. By merely intensifying (but not broadening) the existing toolkit of measures, Powell, the FOMC, and the NY Fed are also dismissing the idea that authorities will be forced by circumstances (namely Treasury yield spikes) by year-end to expand the scope of asset purchases (for reserve-management purchases) from solely T-bills to include coupons. PowellClarida, and Williams have each described buying shorter-dated coupons as a possibility, but not as part of the current plan. 
  • Risk. All the operation size limits that have been provided are explicitly minimums and the NY Fed reminds the public that it “intends to adjust the timing and amounts of repo operations as needed.” They are unlikely to reduce the sizes and frequencies of operations so the risk is clearly to the upside. 
  • Personnel. Consistent with an earlier report, the NY Fed chose:
    • Lorie Logan (who has been acting SOMA manager in the interim) as SOMA Manager, effective January 1, 2020; and
    • Daleep Singh as Head of the Markets Group, effective February 2020.

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