New York Fed pumps liquidity into markets

'Changes are being made to address highly unusual disruptions in Treasury financing markets'

The New York Federal Reserve moved to calm financial markets on Thursday, saying by the end of business Friday it will offer $1.5 trillion in repurchase operations for Treasury securities, where market liquidity had become strained.

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The operations include $500 billion of 3-month operations conducted Thursday which settle on Friday and $500 billion of both 1-month and 3-month operations conducted tomorrow and settling the same day.

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The Fed conducts repo operations by buying Treasurys or similar securities from counterparties with an agreement that it will sell them back at some point in the future. The operations are designed to increase the amount of reserves available in the banking system.

“These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” the New York Fed said in a statement.

U.S. equity markets more than halved their losses following the announcement with the Dow Jones Industrial Average briefly trimming its drop from about 2,000 points to 800 points in a matter of minutes. The Dow fell back near session lows as the traders digested the announcement.

"Clearly worried by signs of stress in Treasury and funding markets, the NY Fed fired its bazooka – offering an additional $500bn in three-month repo auctions both today and tomorrow and a $500bn one-month repo auction tomorrow," wrote Paul Ashworth, chief U.S. economist at the London-based Capital Economics.

"For comparison, the entire value of outstanding repos had fallen to $150bn last week. If markets take the Fed up on all the funding being offered, its balance sheet would increase by $1,500bn to a record high of more than $5trn."

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The Fed's balance sheet peaked at about $4.5 trillion and had fallen to about $3.8 trillion by July 2019 as the central bank tapered its program.