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New York Fed Adds $74.2 Billion to Markets in Two Operations

Fed repo interventions take in U.S. Treasurys, agency and mortgage bonds from eligible banks in what is effectively a short-term loan of central-bank cash, collateralized by the securities. Banks accessing this money—the companies are called primary dealers—are limited in the amount of liquidity they can tap from the Fed, and they pay interest to the central bank to get the funds.

Fed money-market interventions are aimed at keeping the federal-funds rate within the 1.5% and 1.75% range, and to limit the volatility of other money-market rates. The Fed restarted its repo operations in September after unexpected market volatility and has steadily increased the sizes of its operations. Demand for Fed money has waxed and waned.

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The repo market shook the financial world in September when an unexpected rate spike choked short-term lending, spurring the Federal Reserve to intervene. WSJ explains how this critical, but murky part of the financial system works. Illustration: Jacob Reynolds for The Wall Street Journal

The Fed targets control of the fed-funds rate to influence the overall cost of credit in the economy, as part of its work to achieve its inflation and job goals. The Fed had hoped to end its repo operations this month as Treasury-bill buying bolstered the underlying level of reserves. But earlier this week, the New York Fed said repo operations will continue through at least mid-February, and there are widespread expectations repos will stay around for even longer as the central bank tries to sort out why money-market functioning has changed.

The Fed said Thursday that its balance sheet stood at $4.18 trillion as of Wednesday, versus $3.8 trillion in September. Peak Fed holdings were $4.5 trillion. About $229.5 billion in repo interventions were also outstanding on Wednesday, versus $210.6 billion on Jan. 9.

While Fed officials have said repeatedly that their interventions are technical, there is skepticism on that point among many financial market participants. Most Fed officials say the temporary and permanent interventions are aimed only at affirming existing control over short-term rates and aren’t aimed at pulling down longer-term yields, as past stimulus efforts were.

However, Dallas Fed leader Robert Kaplan sees the situation a little differently. Speaking with reporters in New York on Wednesday, Mr. Kaplan—he will be a voting member of the rate-setting Federal Open Market Committee this year—said he is sympathetic to those who fear the Fed balance-sheet operations are pushing up stock prices.

“Many market participants believe that growth in the Fed balance sheet is supportive of higher valuations and risk assets,” Mr. Kaplan said.

“The Fed balance sheet is not free, and growing the balance sheet has costs,” Mr. Kaplan said. “It would be healthy to get to a point where, certainly, we don’t need to do these daily and term [repo] operations. But I also want to do that in a way that has a structure and mechanisms in place that will again temper, limit, restrain the growth in the balance sheet overall.”

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


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