Meanwhile, the Fed relentlessly sheds MBS, replacing them with Treasuries, including short-term Bills.
Total assets on the Fed’s balance sheet jumped by $184 billion over the past month through October 2, to $3.95 trillion, according to the Fed’s balance sheet released Thursday afternoon. This increase was mainly a result of the New York Fed’s repo operations – particularly the three repo operations with 14-day maturities that will all unwind next week:
The New York Fed used to conduct repo operations routinely as its standard way of controlling short-term interest rates. When short-term rates spiked following the 9-11 attacks, the Fed responded with a burst of repos for six days, at which point short-term rates settled down, and those repos unwound. When Lehman and AIG collapsed in September 2008, the Fed switched from repo operations to emergency bailout loans, zero-interest-rate policy, QE, and other “tools.” Repos were no longer needed to control short-term rates and were halted. Then last month, as repo rates spiked, the New York Fed dusted off its trusty old repo tool.
The New York Fed currently engages in two types of repo operations: Overnight repurchase agreements that unwind the next business day; and 14-day repurchase agreements that unwind after 14 days.Meanwhile, the Fed relentlessly sheds MBS, replacing them with Treasuries, including short-term Bills.