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New York Fed Moves to Keep Money Markets Calm Amid Turmoil


WASHINGTON — The Federal Reserve Bank of New York on Monday announced that it would ramp up the amount of short-term loans it offers banks, an effort to keep cash flowing smoothly through the financial system as markets gyrate amid fears about economic fallout from the coronavirus.

The infection has now sickened about 110,000 people, and as it spreads through the United States and Europe, worries are mounting that growth will slow dramatically. That, together with plunging oil prices, has sent global markets into turmoil.

Between Monday and Thursday the New York Fed pledged to increase its daily offering of overnight repurchase agreements — essentially short-term loans to eligible banks — to at least $150 billion from $100 billion. It is also increasing its offering of two-week loans starting tomorrow, to at least $45 billion from at least $20 billion.

The moves “are intended to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures,” the New York Fed said in a statement.

“They should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus,” the statement said, though it added that the Fed will “continue to adjust” operations as needed.

The Fed had already been active in the market for short-lived loans between banks and financial institutions — called the repurchase or “repo” market — for months, starting after rates in that obscure but important corner of the financial system’s plumbing spiked back in September. It had recently been shrinking the size of its injections as markets calmed.

But demand at its regular repo operations surged as markets swung, fueling speculation by investors that the Fed might lift the size of its offerings.

Officials have also been buying $60 billion in short-term Treasury bills each month to build up the financial system’s buffer of bank reserves, essentially deposits at the Fed. The goal was to keep cash flowing smoothly so that borrowing costs in money markets would stay under control.

“We will ensure that the supply of reserves in the banking system remains ample,” John C. Williams, the New York Fed president, said in a speech last week. “We are monitoring conditions in money markets closely.”

The actions are the Fed’s latest effort to insulate the economy and financial system from painful fallout as coronavirus spreads, threatening global growth and even the domestic expansion.

The Fed cut interest rates by half a percentage point last week in an emergency move, lowering its benchmark policy tool to a range of 1.0 to 1.25 percent. It is widely expected to slash rates by another half point by March 18, the conclusion of its next meeting. Many investors anticipate that the Fed, which cut rates to near zero during the financial crisis, will return to that level by April.

Many economists expect the Fed to do more to keep market plumbing functioning normally, perhaps by rolling out programs last used during the financial crisis.

“In our view much more will need to be forthcoming and very soon,” economists at Evercore ISI wrote in a note following the Fed’s announcement. They speculated that the central bank might extend its Treasury bill-buying program, which would help to keep the financial system flush with cash and potentially help to avert short-term funding disruptions.

The central bank could also activate so-called “swap lines,” the Evercore ISI economists said. The Fed has a history of using its agreements with global partners to help foreign central banks deliver U.S. dollar funding to financial institutions in their regions amid market stress.

The Fed has gotten creative in previous crises, using an alphabet soup of fixes in depths of the financial meltdown. That could happen again. When investors became reluctant to lend in the depths of the financial crisis, the Fed auctioned 28-day loans, and later 84-day loans, to banks that were still in decent shape. The program, known as the Term Auction Facility, spanned the end of 2007 to mid-2010 and allowed the Fed to get money flowing among a broader range of financial market players.

But such efforts will only mitigate damage. They cannot fix ruptured supply lines or send quarantined workers back to the office nor can they stop the spread of a virus.

“Monetary policy is probably not particularly effective at the moment,” Goldman Sachs chief economist Jan Hatzius wrote in a note. “Fiscal policy is probably the more potent tool.”

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