Federal Reserve

The Fed is extending its overnight funding operations through January 2020

Key Points
  • The Federal Reserve will be extending its temporary overnight repo operations through at least January.
  • In addition, the central bank said it will be buying short-duration Treasury bills through at least the second quarter of 2020.
  • Both announcements come as the Fed is looking to address issues in the short-term lending markets.
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The Federal Reserve will be continuing its overnight funding operations through at least January and will start buying Treasury bills next week through the second quarter of 2020, the central bank announced Friday.

The T-bill purchases will be large — $60 billion in the first month despite Fed officials' insistence that the operation will be an "organic" move to grow the central bank's balance sheet and the level of bank reserves, as well as to keep the benchmark funds rate within its targeted range. The purchases will involve maturities of between five and 52 weeks.

Following a disruption in short-term lending markets in mid-September that sent interest rates soaring, the Fed began conducting its own operations to provide financial institutions with cash in exchange for ultra-safe assets like government bonds.

Most recently, the Fed said the repo operation would end Nov. 4.

The announcement comes as Chairman Jerome Powell also said that the Fed will be expanding the size of its $4 trillion balance sheet through further short-term T-bill purchases.

Fed officials met by video conference on Oct. 4 to discuss "issues related to the recent pressures in money markets and monetary policy implementation," according to a news release.

Documents from the central bank state the overnight repurchase operations "at least through January" and will be buying T-bills "at least into the second quarter of next year."

On the latter operation, Powell has been adamant in pointing out that the T-bill purchases, though aimed at expanding the Fed's balance sheet and, correspondingly, bank reserves, this should not be confused with the quantitative easing that occurred during and after the financial crisis.

Under QE, the Fed sought to lower long-term rates and push the appetite for risk assets. The balance sheet expansion will be "organic," Powell has said, and will be targeted at making sure bank reserves are plentiful and that the Fed's benchmark overnight borrowing rate stays within its targeted range. During the September cash crunch, the funds rate briefly rose 5 basis points above the range.

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