Federal Reserve's Increased Repos Meet Low Demand

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The Federal Reserve has attempted to increase liquidity through repos despite low demand from primary lenders.

Repo operations are market repurchase agreements in which the main objective is for the Federal Reserve to pump more cash into the economy. More cash in the economy will mean that lenders have a lower chance of encountering a liquidity scare in the event that many customers at a bank seek to withdraw cash.

Preventing liquidity scares has been a focus after the financial recession, with legislation being passed that ensures that regulators watch out for low cash reserves among primary lenders.

The Fed had a 14-day repo and offered up to $35 billion, however primary lenders only utilized $18 billion. The same lack of demand was experienced in an overnight repo on Thursday that only yielded a demand of $29 billion in bids, despite the availability of $120 billion.

The lack of demand could signal that banks already have strong cash reserves. The Fed took an active effort to increase the amount offered at repos because of its increased lending activity. The lending rate of the Fed increased by 10% in September. Typically, the Fed tries to keep lending rates within the 2% window.

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Economics, Finance and Investing

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