The Fed’s choice to inject cash into the economy through the repo market demonstrates the institution’s continued pattern of prioritizing big banks over the average taxpayer. Additionally, the lending practices that it has employed to bail out Wall Street prior to the pandemic established the precedent for the actions it is taking now, including $1 trillion dollar in measures, during the pandemic to bail out Wall Street.
The repo market serves as the backbone that supports the operations of major banks on Wall Street. In order for large lenders to cover the costs of their day to day operations, including trades, banks offer high-quality securities to the Fed as collateral in order to raise cash, according to the New York Times. These are short term loans where the Fed buys these loans, providing banks with needed cash, and once banks turn a profit, the securities are bought back from the Fed at the original selling price plus interest.
Banks rely on the cash reserves at the Fed to continue trading. Between September through December of last year, the Fed massively expanded the amount of corporate bonds it bought from major banks on Wall Street and other large firms. More specifically, according to the minutes from the Fed’s meeting on December 10th-11th, 2019, the central bank had been repurchasing $215 billion worth of securities each day. This amount to trillions of dollars of injected liquidity in a matter of months, all in an effort to support the operations of Wall Street.
The Fed injected cash into the economy by making borrowing cheaper for Wall Street banks. According to Reuters, in September the Fed cut the interest rate it charges on repo deals down to 1.7% which is five percentage points below its target rate. Once again, the Federal Reserve is expanding its repurchasing power, now in an effort to protect Wall Street during the coronavirus pandemic, according to CNBC.
“We continue to emphasize that this Fed will act aggressively and in particular that central banks are focused on safeguarding market functioning at this point, and will continue to provide liquidity in scale,” Ebrahim Rahbari, director of global economics at Citi Research. “However, despite the sharp initial risk rally, we think these measures will still not be sufficiently to durably stabilize market sentiment yet in light of credit concerns and escalating health concerns.”
Bills, notes, Treasury Inflation-Protected Securities will be able to be purchased by the Fed and $500 billion will be added to the reserves used to finance repo deals, according to CNBC. This is in addition to the typical $175 billion in overnight repos and $45 billion in two-week operations that the central bank already spends.