Fed seen adding via overnight RPs, risk of term RPs

NEW YORK, Jan 27 (Reuters) - The Federal Reserve is likely to add reserves to the banking system on Thursday via overnight system repurchase agreements, analysts said. They said there was a risk the Fed might do term repos as well.

"We expect a repo today; the question is the term. Frequently they do an overnight at the beginning of a new maintenance period, but I wouldn't be surprised if there was a longer-term repo...perhaps a four-day or seven-day," said James Blumenthal, economist at MCM Moneywatch.

Carol Stone, senior economist at Nomura Securities International, also said there was a risk the Fed might do a seven-day fixed repo.

"Today they have $14 billion in last fall's extended-term operations that are coming off, and yesterday's ($1.069 billion) coupon pass covered some of that but not all of it," Stone said. "The bulk of the add need could be Monday and Tuesday with month-end -- so it could be they just do an overnight until they get a handle on how big that (add need) might be."

In early dealings, federal funds were trading between 5-9/16 and 5-5/8 percent, according to Garban-Intercapital, above the Fed's 5-1/2 percent target for the rate.

What is the implication of adding additional reserves to the banking system via a term Repo?

-- Possible Impact (posim@hotmail.com), January 27, 2000

Bold off
Didn't save the last change after preview, gets you every time.(sigh)

-- Possible Impact (posim@hotmail.com), January 27, 2000.

It appears they want to replace some of the liquidity that was injected last fall. Last fall,the FED increased short term liquidity by entering a fixed period repurchase agreement swapping greenbacks to banks in return for T-Bills that were on the banks assets.

Your quoted post indicates that some of the initial Y2K liquidity funds are scheduled to be returned to FED. The above quote appears to indicate an ongoing liquidity need by some banks.

This means that the FED is extending the term period of the initial Y2K liquidity injection.

In light of recent bad weather and oil product price moves, this may be a response to ongoing cash demands by consumers.

It could also mean that some banks are stretched and need to increase their cash on hand as demand increases.

BY keeping last falls cash infusion in the money supply, I would agree that this is inflationary and foreshadows upcoming interest hikes.

This indicates that the oil price run may continue up and that gold and silver hard assets may start to appreciate.

-- Bill P (porterwn@one.net), January 27, 2000.

Bill P,

Good analysis.

-- Dee (T1Colt556@aol.com), January 27, 2000.

**Update**

*FED SAYS ADDED $8.000 BLN OF RESERVES VIA 4-DAY SYSTEM REPOS
NEW YORK, Jan 27 (Reuters) - The Federal Reserve said Thursday's four- day fixed-system repurchase agreements added $8.00 billion in temporary reserves to the banking system.

The Fed also conducted an overnight system repo on Thursday. The Fed said volume on that operation would be available shortly.


FED SAYS ADDED $2.800 BLN OF RESERVES VIA OVERNIGHT SYSTEM REPOS
NEW YORK, Jan 27 (Reuters) - The Federal Reserve said Thursday's overnight system repurchase agreements added $2.800 billion in temporary reserves to the banking system.

The collateral breakdown under triparty settlement was:
-- $0.630 billion in Treasuries, 5.51 percent stopout;
-- $0 billion in agencies;
-- $2.170 billion in mortgage-backed securities, 5.59 percent stopout.

The Fed also added $8.00 billion in reserves earlier in the session. The collateral breakdown for that operation was as follows:
-- $2.745 billion in Treasuries, 5.48 percent stopout;
-- $3.730 billion in agencies; 5.54 percent stopout;
-- $1.525 billion in mortgage-backed securities, 5.56 percent stopout.

Thank you Bill P for the analysis, this is not my area of expertise. I did think it could be signifier of something 'not quite right'.

-- Possible Impact (posim@hotmail.com), January 27, 2000.

Thank you Bill P. for the excellent analysis!

If I might add something to that, for the benefit of the general readership. The amount of reserves injected into the system last fall was very large. That liquidity, did not appear to raise prices proportionately in the commodities markets in Q4. Judging from appearances, most of that extra liquidity found its way into the stock market. We now have a *seriously* disequalibrate economy as a result.

Looking at the behavior of the markets this week, I sensed the first signs of a liquidity crunch. By extending the life of the repos, the Federal Reserve appears to be trying to cushion the markets, hoping to engineer that gradual deflation of the bubble which would constitute the most benign outcome to this mania. I wish them luck.

The activities of the Fed are not without peril. The stock market is highly leveraged. The effects of drawing down liquidity will be magnified by the unwinding of leveraged positions. Since a disproportionate amount of the excess liquidity was sopped into stocks, drawing liquidity down will disproportionately parch the stock market. If the Fed doesn't want to upset the apple barrel, it will be required to draw liquidity down slowly.

However, if the Fed draws down slowly to protect stock investors, they will certainly alarm bond investors and currency traders. These people control a lot of dollars. The bond traders will undoubtedly move interest rates up by dumping bonds. The currency traders will undoubtedly devalue the dollar by dumping dollars. The Fed would lag behind these markets, but they would be dragged into raising rates much faster than they want.

Much of the coziness of our "golden" economy has been based on the international perception that the dollar is not inflating, and that in an uncertain world holding dollar-denominated assets was the safest course of action. The run up in oil prices and the run up in M3 is destroying that perception. Some time in the first half of 2000, the Federal Reserve will meet its Rubicon. It must move decisively against inflation and end the stock bubble, or it must allow money to migrate into commodities until they have risen sufficiently so that stocks are no longer overvalued in relation to the real world.

Since stocks have risen 20% a year for several years while commodities have been mostly stagnant or falling, you may calculate where inflation might end up if the Fed takes the latter course. More likely, stocks will fall to meet reality, with commodities rising to meet them partway.

I invite your objections, corrections or additions to this view. I hope my assessment is too pessimistic. I fear it may be too optimistic.

-- Brian McLaughlin (brianm@ims.com), January 27, 2000.

The precipitous heights along which we walk become increasingly lofty and narrow. To the right looms steep deflation. To the left, spiraling inflation. What had been an easy stroll in the clear alpine sun, turns ever more into a perilous balancing act.

Oh, but for a pair of wings!

-- tim phronesia (phronesia@webtv.net), January 27, 2000.