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The Federal Reserve proceeded on Tuesday with a repurchase agreement on various instruments of loan for an amount of 53 billion dollars in order to control the level of its benchmark interest rate.
Wall Street was buzzing about Tuesday by a break in funding markets that could prompt the Fed to revive its controversial program of quantitative easing or even make other adjustments.
The "repo" move came one day after the turmoil in the market, when rates climbed to record levels and the growing concern that the Fed would lose control of its benchmark rate.
The pension market "broke" on Monday as the Fed's overnight Fed float above its target range of 2% to 2.25% "raises questions about the Fed's ability to control the money markets, "Mark Cabana, rate strategist for the Bank of America Merrill Lynch, said in a note.
An effort on Tuesday morning to execute a 15-minute operation had to be postponed due to technical difficulties but had resumed around 10 hours.
Bond repurchase transactions saw a dramatic turnaround on Monday, with overnight repo rates of up to 8.5%, while the Fed's own funds rate was in the top half of the market. the current target range of 2.25%. Market participants were concerned that the Fed would lose the opportunity to keep the benchmark with the range.
The duration of the operation was to be brief, from 9:30 to 9:45 am on Tuesday morning. It was unclear when the New York Fed would try to revive the program.
"It's definitely a good start," said Lou Crandall, chief economist at Wrightson ICAP.
The increase in the repo rate occurred as concerns were expressed about the supply of dollars in essential supplies for operations. Corporate tax payments, due Sept. 15, are causing some market problems, according to various sources.
Market experts said that in addition to Tuesday's operations, which should calm short-term market turmoil, the Fed will have to explore new avenues, which could include additional quantitative easing just one month after the central bank has ended its balance sheet reduction.
Although the Fed has expressed a desire to allow banks' reserves to remain high, it may still need to expand its balance sheet to provide banks with more reserves.
"There are probably a lot of technical factors at work here, but that underscores our view that the Fed has reduced the level of its reserves sufficiently and too much and will have to start increasing its balance sheet in the near future, while potentially adding new operations. Open market in the end, put in place a reverse repurchase mechanism to provide support to the funding markets when funding pressures become too tight, "said Krishna Guha, head of global politics and the central bank strategy at Evercore ISI.
Guha said the soaring repo rates had caused a "significant disruption" in the markets and that he thought the Fed would announce this week that it would begin to increase its balance sheet up to $ 14 billion. per month. The Federal Open Market Committee, which has made decisions, will close its two-day meeting on Wednesday against market expectations of a further 25 basis point reduction in the overnight benchmark rate.
However, the committee may also be forced to lower the rate it pays for the excess services. The IOER is used as a lever to control the funds rate, but it has sometimes exceeded the benchmark.
Wells Fargo's strategists have said that such disruptions occur at the end of months, quarters and years, although it is unusual to see them mid-month.
"Nevertheless, we do not think this indicates a stress of funding among the banks.Although it may be temporary or a stroke of luck, it could still be a warning sign of an unusual event. which investors should be paying attention to in the short term, "analyst James Strecker said in a note.
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