The Fed addresses repo concerns
From TOMO to POMO and a lower fed funds target range, it’s taking measures to keep the markets on a steady keel.
Published December 4 2019
Hi, I'm Deborah Cunningham, Chief Investment Officer of the Liquidity Markets here at Federated Investors.
How is the Fed working to address the recent issues in the repo market?
The spike in repo rates and the volatility that we saw from the middle part of September on is definitely something that the Fed is attempting to mitigate going into the last quarter of the year. They've done several things to address it. On a temporary basis, they are conducting what they call TOMO, temporary open markets operations for overnight as well as two-week term, and on important days such as mid-month, month-ends, quarter-end, December 31st year-end, they will increase those operations even more to make sure that the impact from a rate perspective in the marketplace keeps rates fairly close to the target range that they have.
They've also introduced what are called permanent open market operations, or POMO, and there we've got basically 60 billion per month that in treasury bill supply that is being purchased out of the marketplace by the New York Fed and kept them back onto the treasury's balance sheet. So it is more permanent than the daily operations and more impactful in the context of keeping rates at basically at an even keel. They also lowered the Fed Fund's target range again in the month of October during the last FOMC meeting. They took that range down to one and a half to one and three quarters, with a 145 in the reverse repo facility.
I think that's probably in line with where they currently believe the neutral rate is, so that's a third measure. And then, really I think what they will spend a lot of their time this quarter addressing, besides these daily changes, is what to do on an even more permanent basis in 2020, and to that end, they've discussed having a repo facility come to the marketplace, whereby they are able to more easily add reserves into the system and as such, when those reserves increase, have more participation in the repo marketplace from a financing perspective, so the supply and the demand side of the equation will thus be a little bit more aligned. That is again not something though that they will undertake in the 2019 timeframe, but I do think with expanded counterparties, it will probably come to fruition sometime in 2020, to again address the volatility and keep the markets on a more steady keel.
Views are as of 11/8/2019 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Federated Investment Management Company 19-30177 (11/19)