The Federal Reserve Bank of New York said Wednesday that it would increase the size of its overnight repo operations to $120 billion from the current $75 billion.
The Fed announcement came without explanation. Recent Fed offerings for the short term repurchase agreements, or repos, have been oversubscribed, meaning banks sought more liquidity than the Fed was prepared to provide.
On Tuesday, the Fed injected nearly $100 billion in combined overnight and slightly-longer term loans to banks.
Senator Elizabeth Warren recently addressed a letter to Treasury Secretary Steven Mnuchin in his role as chair of the Financial Stability Oversight Council, asking for an explanation for why banks have recently required these huge daily cash infusions.
In a repo operation, banks and broker-dealers sell bonds in exchange for cash with an agreement to buy them back the following day or in a couple of weeks, depending on the length of the operation. These are the equivalent of very short term loans.
When the Fed initially stepped into the market following a spike in interest rates for repos in September, the interventions were much smaller and expected to last just a few weeks. Since then, however, the market has demanded increasing amounts of liquidity with no end in sight. It is now considered very likely that such operations could become permanent.
Since the loans are paid back to the Fed after a short period, they are not thought to have any inflationary effect.
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