Latest transaction seeks to relieve funding pressure in money markets
The Federal Reserve Bank of New York added $63.5 billion to the financial system Monday, using the market for repurchase agreements, or repo, to relieve funding pressure in money markets.
Banks asked for $63.5 billion in overnight reserves, all of which the Fed accepted, offering collateral in the form of U.S. Treasury and mortgage securities.
In the repo market, borrowers seeking cash offer lenders collateral in the form of safe securities—frequently Treasury bonds—in exchange for a short-term loan. The term of these loans can be as short as overnight.
When the Fed adds money to the financial system through the repo market, it is acting as a lender. In typical repo market transactions, lenders can include money-market mutual funds, banks or hedge funds that are seeking to earn a slightly higher rate of interest than what is available from holding very short-term government securities. The borrowers are often banks, securities firms or hedge funds that use the cash to finance positions in the market.
Banks and hedge funds borrow or lend depending on their needs and investment goals.
The Fed began offering repo loans two weeks ago after a shortage of available cash in the financial system led repo rates to climb as financial companies scrambled for overnight funding. The actions marked the first time since the financial crisis that the Fed had taken such actions.