Derby, M. (2020, Mar 27). Derby's Take: There's So Much Fed Liquidity, Some Firms Are Handing It Back; Dow Jones Institutional News; New York . Retrieved from http://ezproxy.liberty.edu/login?url=https://search.proquest.com/docview/2383718458?accountid=12085
Impact of Coronavirus Pandemic to Firms
There are far-reaching consequences of the 2019-20 coronavirus pandemic beyond the disease spreading and the countless efforts to contain it. Therefore, any advances made in containing the virus come at the price of negatively reshaping the economy whether the measures are voluntary or enforced. Such makes the operations of the Federal Reserve liquidity get complex. It is a norm for the Fed to flood the financial system with short-term loans that are only eligible to financial firms such as mortgage securities, agencies, and primary dealers. These type loans are referred to as repos and can also be collateralized by the treasury.
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However, these repos, which were once at the frontline of Fed response, have not made a breakthrough amid this Coronavirus pandemic. The demand for repo has gone low from a peak demand of $514 billion on March 17 to the current $352.4 billion. The above has been attributed to the Fed trying to create tools to help other parts of the financial firms while and concurrently wanting to make large purchases of treasury and mortgage bonds. In other words, there are several ways to deal with the needs of liquidity, given the spectrum to the central bank's policy action.
In the meantime, there are partial facilities that lend Fed-owned treasury's to money managers in exchange for cash and is referred to as reverse repos . Over the past few years, reverse repos have been surging but have now sprung to life from near ashes to the current $138.48 billion. In turn, the significant rise is a clear indication that the Fed has flooded cash in the market, thus pushing money-market rates to deficient levels that most firms find it easier to park back money to central bank's books.
Scott E.D. Skyrm , a leading figure in both the trade market of repos and curvature security says, "As long as repo rates remain so close to 0%, [reverse repo] volume will be high. Repo rates will be close to 0% as long as we are in crisis mode, and the Fed pumps so much [repo] cash into the market." Therefore, reverse repos can be an option for the government to park excess cash, which of essence will mop up the excess liquidity created by the Fed's crisis response.
