Fed to conduct technical ‘repo operation’ Tuesday to keep its benchmark rate where it wants it

FAN Editor

The Federal Reserve said Tuesday it will conduct a repurchase operation involving $75 billion worth of various debt instruments as it seeks to control the level of its benchmark interest rate, which is teetering above the range where the central bank wants it.

Repurchase operations in the bond market spun wildly Monday, with the overnight repo rate spiking to as high as 10% while the Fed’s own funds rate hit the top end of the current target range of 2.25%. Market participants worried that the Fed might be losing the ability to keep the benchmark with the range. 

The duration of the operation will be brief — from just 9:30 to 9:45 am Tuesday morning. 

“It’s certainly a good start,” said Lou Crandall, chief economist at Wrightson ICAP.

The repo rate surge happened amid concerns about dollar funding supplies critical to making the short-term operations work. Corporate tax payments, due on Sept. 15, are the source of some of the issues in the market, according to various sources.

Market experts indicated that aside from Tuesday’s operations, which should quell market disruptions over the short term, the Fed will need to explore further avenues, which could include more quantitative easing just a month after the central bank halted its balance sheet reduction.

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