Watching the progress of Wall Street, things are going seemingly well. The indexes are at maximum despite global uncertainty, credit flows through the real economy normally, companies hire at a solid pace and banks have large capital buffers. But there is a dark and remote corner of the financial system, which only large companies, banks and asset management funds have access to, where tension dominates and is forcing the Federal Reserve to mobilize to contain the situation.
It all started in mid-September, when the types of short-term loans skyrocketed. The Fed proceeded to reactivate by surprise a program that allows it to make daily purchases of ultra secure debt in exchange for cash, in order to inject liquidity into the system and in the process control the price of money. That tool is known as "repo" and the last time it was used was eleven years ago, in the financial crisis. The idea was to maintain these market operations for a few days.
The repo consists in general terms of a repurchase operation whereby a financial institution or institution sells an asset to an investor under the agreement to buy it again at a certain date at a certain rate. It is usually done with public debt securities. This mechanism allows the Fed to act almost immediately to respond to timely liquidity needs and maintain the flow of credit.
Purchases are made by the Federal Reserve of New York, the bank that executes monetary policy in the United States. The exchange is made through daily auctions of 75,000 million dollars. The demand far exceeded the offer, so it was decided to extend it a little more in time. President Jerome Powell insists that it is a technical adjustment, but the measure was not enough to reduce the tension. The mechanism will now remain until at least January.
The disturbing thing is that the reason for this tension is not well explained. Initially it was attributed to the convergence of several public debt auctions and the payment of taxes by large companies. Powell continues to maintain that theory. However, it also reflects that the Fed was too fast in the process of reducing the balance, to take it to a more normal level. That will force him to resume next Tuesday the purchases of letters from the Teroso.
The plan is to accompany the “repo” with an extension of the reserves at a rate of 60,000 million dollars in the first month, until the second quarter of next year. The Fed currently has assets valued at about four billion dollars. Powell insists that it is not a new rate reduction by quantitative means and that the purpose is to take liquidity reserves to a level that gives it flexibility, to meet the market's credit demand.