The 52-day repo conducted earlier this week by the Federal Reserve was within the term length criterion prescribed by the Fed's policy committee in January. To arrange such a period is, therefor, within the discretion of the system account manager. A look at open market operations over the last year-end holiday season shows large temporary amounts of Fed RP outstanding in order to resolve both a temporary increase in currency demand and constriction of financial market liquidity while investment firms were closing their books on the year 2002.
Although very long-term RPs -- once termed quasi-coupon pass by a Morgan Stanley economist -- have always made me a bit uneasy. But, the intent is clear. I am, therefor, satisfied that nothing extraordinary is being attempted.
This is not to say, of course, that there will not be a surge of liquidity from the Fed between now and year's end. Only that the current circumstance is not worthy of concern.
Treasury may also begin adding liquidity via repurchase agreements, as also happened last year.
We'll have to see how it goes. The Fed is certainly renowned for its overzealous approach to financial market liquidity. Such enthusiasm has been known to drive share prices higher and interest rates a little lower.
You may also have noticed an overnight RP in the amount of $12 billion conducted on the same day (Monday) as the 52-day operation. It is my opinion that a considerable amount of foreign selling of US shares in the overnight session continued into the open, pressuring the Fed for liquidity in the process. There have been more than a couple of instances of this in the past, and they were not good signals for share prices in the near term. The same day was also settlement for the previous week's auction of 10-yr Treasury notes. Too, for those who may be interested, it appears that bills were purchased in the large RP conducted on Monday.
The per annum rate of M2 growth fell further, from minus 2.0 to minus 4.0 percent.
The spread between the seasonally adjusted and unadjusted system factors narrowed on strong demand for US currency. The Fed's open market portfolio grew little on a coupon pass conducted on Tuesday for $0.786 billion. Once again, I am not presently concerned for this.
In the statistical periods that ended November 12, retail and institutional MM funds declined noticeably; and in accordance, I suppose, with the sizable run-up of share prices on Wednesday the 12th.
See you with a full report next week.
Yours truly,
Moto
piraz.com |
