After navigating a quiet end to money-market trading in 2019—greased by a massive wave of central bank liquidity—the Federal Reserve Bank of New York injected a modest amount of money into financial markets on Thursday.

In two separate operations, the New York Fed added $56.72 billion to financial markets via repurchase-agreement, or repo, operations. One was via a $29.05 billion overnight repo, and the other was via a $27.67 billion 14-day repo. Eligible banks, known as primary dealers, took far less liquidity from the Fed than the central bank was willing to offer.

Fed repo interventions take in Treasury and mortgage securities from eligible banks in what is effectively a short-term loan of central bank cash, collateralized by the securities. Banks eligible to access these operations are limited in the amount of liquidity they can tap from the Fed.

The first day of trading for 2020 followed a calm end to last year. Fed repo interventions are aimed at keeping short-term rates in line with Fed objectives. The current fed-funds target-rate range stands between 1.5% and 1.75%. On Tuesday, the effective fed-funds rate stood at 1.55%, and other short-term rates were right around that level.

The Fed controls the fed-funds rate to set a baseline for borrowing costs. It does this to affect overall economic activity to achieve the low and stable inflation and maximum sustainable job growth that Congress has set for the central bank.

The repo market shook the financial world in September when an unexpected rate increase choked short-term lending, spurring the Federal Reserve to intervene. WSJ explains how this critical, but murky part of the financial system works, and why some banks say the crunch could have been prevented. Illustration: Jacob Reynolds for The Wall Street Journal

Fed market interventions, a very long-running part of the Fed’s monetary policy tool kit, returned in September after a decadelong break after money markets endured an unexpected wave of volatility due to a confluence of factors that impaired firms’ ability to lend to one another on a short-term basis. The Fed has said it plans to wind down its large-scale temporary operations by the end of January and to end Treasury bill buying by the middle of the year.


The Fed reported that its balance sheet had risen to $4.17 trillion as of Jan. 1 from $3.8 trillion in September. About $255.6 billion in repo interventions were also outstanding then. Banks have taken quite a bit less than the nearly half trillion dollars in temporary money that the Fed had been willing to provide.

Over Monday and Tuesday, the Fed stood ready to offer eligible banks a massive amount of money to ensure rates wouldn’t endure too much volatility over year’s end. Year and quarter ends can be choppy due to companies dealing with regulatory and other factors. That didn’t happen this year, and in the end, eligible banks drew far less liquidity than the Fed was willing to offer.

“It became clear in the days leading up to the end of the year that fears of a year-end repeat of the mid-September repo market chaos were going to be misplaced,” Oxford Economics told clients in a note. “The Treasury [general collateral] rate for the year-end turn traded as high as 4.35% a couple of weeks prior to year-end, but that declined steadily as the Fed offered as much as $490 billion in repo funding for the occasion, of which $255.6 billion was borrowed.”

“With year-end funding concerns behind us, the overnight Treasury [general collateral] rate opened back at 1.58% this morning, down from the roughly 1.85% open on Tuesday morning, although it’s ticked up to 1.60% in early trading,” the firm said.


While the Fed and markets managed to navigate the end of the year, there is a broad expectation that money markets will need a more enduring fix to ensure volatility in that part of the nation’s financial infrastructure remains modest.

Write to Michael S. Derby at michael.derby@wsj.com