By Michael S. Derby 

The Federal Reserve Bank of New York injected $68.9 billion in short-term liquidity to financial markets as part of its continuing bid to tame volatility in money-market rates.

The intervention came in two parts. One was via overnight repurchase agreements, or repos, that totaled $49.9 billion. The other was from a $19 billion 14-day repo operations. The central bank supplied all the liquidity eligible banks sought.

Fed repo interventions take in Treasury and mortgage securities from eligible banks in what is effectively a short-term loan of central bank cash, collateralized by the securities. The intervention Thursday followed the conclusion of the rate-setting Federal Open Market Committee meeting Wednesday. Then, officials maintained short-term interest rates and indicated they will leave them near current levels through next year.

The Fed's money-market operations are aimed at ensuring that the financial system has enough liquidity to keep short-term borrowing rates stable and consistent with Fed goals, with the central bank's federal-funds rate staying within the 1.5%-to-1.75% target range. The Fed has repeatedly said repo operations are technical in nature and have no broader economic implications.

In money markets Wednesday, the effective fed-funds rate stood at 1.55% and the broad general collateral rate for repo trading stood at 1.5%.

The Fed is legally charged by Congress to keep inflation low and stable, and to promote maximum sustainable job growth. As it has for decades, the Fed seeks to accomplish these mandates by setting the level of short-term interest rates, which then determines a baseline for the overall cost of credit in the economy. The current rate-control tool kit is designed to control short-term borrowing costs in an environment where banks hold substantial amounts of money on hand for regulatory and other reasons.

The outlook for the repo market figured prominently in the news conference held by Federal Reserve Chairman Jerome Powell after the end of the FOMC meeting.

"Our operations have gone well so far," Mr. Powell said. "Pressures in money markets over recent weeks have been subdued," he said, adding "we stand ready to adjust the details of our operations as appropriate to keep the federal-funds rate in the target range."

The Fed has been intervening in markets in the current fashion since mid-September, when short-term rates unexpectedly shot up on a confluence of factors, the biggest of which stemmed from corporate-tax payments and the settlement of Treasury debt auctions. The Fed has used similar operations for decades to manage short-term rates.

Since the large interventions started, money-market rates have calmed. The Fed is using temporary operations to tamp down any possible wild moves, while purchasing Treasury bills to build up reserves in the banking system. It hopes that by buying Treasury bills, the central bank will be able to cut back on repo interventions at the start of next year.

The central bank currently expects to buy Treasury bills through the middle of next year.

Central bankers have indicated they are still learning what level of reserves the financial system needs, which adds an element of uncertainty to the longer-term outlook for Fed market interventions. Fed officials stress that things like buying Treasury bills to grow holdings aren't a form of stimulus because they aren't designed to influence longer-term borrowing costs, as crisis-era bond buying was.

Although Fed officials have expressed confidence about navigating the year's end, many observers still remain anxious. A recent report from the Bank for International Settlements said the market's liquidity issues go deeper than what happened in September. And a report from investment bank Credit Suisse says the Fed will likely have to buy more than Treasury bills to navigate year-end volatility.

Mr. Powell was sanguine about what lies ahead, however. "Temporary upward pressures on short-term money market rates are not unusual around year-end," Mr. Powell said. "We think that the pressures appear manageable."

What's more, he said, "We are not at this place, but if it becomes appropriate for us to purchase other short-term coupon securities, we would be prepared to do that."

As of Dec. 5, when the data was last updated, the Fed reported that its balance sheet had risen to $4.07 trillion from $3.8 trillion in September. About $208 billion in repo interventions were also outstanding then.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

December 12, 2019 11:58 ET (16:58 GMT)