The Federal Reserve is launching a facility designed to provide liquidity to Wall Street, which could help ensure market stability at times of stress.
The central bank on Wednesday said it would put a so-called standing repo facility in place, effective Thursday. The Fed said the new tool will take in Treasury, agency-debt and agency-mortgage-backed securities from primary dealer firms in exchange for short-term loans of cash, at a rate of 0.25%. It said there is a cap of $500 billion on the facility, and it offered a similar tool to foreign central banks.
The Fed said it would expand access to the standing repo facility in the future. It said the new facilities “will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.”
Instituting such a permanent facility reduces the prospects the Fed will have to add liquidity to markets on an ad hoc basis via what are called repurchase agreements. These so-called repos are de facto short-term loans of cash to eligible financial firms, collateralized with Treasury or mortgage bonds. In the past couple of years, the Fed has had to engage in these repo operations to bolster banking sector reserves and to help navigate the first wave of market panic caused by the coronavirus pandemic.
Fed officials have been debating the launch of the standing repo facility in recent policy meetings. While the concept of the facility had garnered broad support among officials, they nevertheless had wrangled over the details in a bid to ensure the tool reduces the risk of financial stress rather than exacerbates it.
