Update (1125ET): Following the major ‘over-subscription’ for liquidity this morning, NYFed has decided to dramatically increase the scale of its bailout for both overnight and term repo:
The 14-day term repo operation will have an aggregate limit of $60b (prior similar operation Tuesday had a $30b limit).
The overnight repo operation will have an aggregate limit of $100b (most recent such operation Wednesday had a limit of $75b).
This big increase comes just minutes after Fed Governor Lael Brainard tried to clam nerves by claiming that the recent spike in overnight lending rates, which prompted the central bank to inject billions of dollars of liquidity into the market, was the result of a “simple imbalance” of supply and demand — and not a sign of deeper distress in credit markets.
“It may simply be that we’re close to the lowest level of reserves that are necessary for the conduct of monetary policy,” Brainard said Wednesday in testimony before the House Financial Services Subcommittee on Consumer Protection and Financial Institutions.
“It does pose questions about whether reserves in the system do need to be allowed to grow again.”
In 2008, “counter parties pulled away from each other,” Brainard added. “Today we’re in a different environment.”
It’s different this time.
* * *
As we detailed earlier, as month-end looms, demand for dollar liquidity is accelerating dramatically with today’s Fed operation oversubscribed – with around $92 billion of demand for The Fed’s $75 billion offering…
This is the heaviest demand yet for this new Fed liquidity spigot…
As we noted previously, some banks appear to have been simply waiting to get closer to the quarter end before tipping their cards: after all, just like the Discount Window, the repo operation has become the modern “stigmatizing” equivalent, and if reporters or clients get a whiff that a bank is in a dire liquidity state, the consequences could be dramatic.
Never mind though, it’s probably all transitory.