The Federal Reserve is again turning to its overnight liquidity operations to ensure the financial system can weather the risks posed by the coronavirus and, as of Sunday, a crash in oil prices.

Barclays wrote Monday morning that the move will “buy time” for the Fed on further rate cuts, adding that the central bank appears to be messaging a commitment to protecting the plumbing of the financial system.

Before the opening bell on Monday, the New York Fed announced that it was expanding the size of its overnight repurchase market operations from $100 billion to $150 billion. Banks and broker-dealers rely on the repo market to borrow sums of cash overnight to meet financing needs at day-end.

But the money market did not appear to be too stressed ahead of the New York Fed announcement.

Rates on overnight lending as of Friday were 1.08%, comfortably in the Fed’s target range of 1.00% to 1.25%. For comparison, the flare-up in repo markets last September saw rates nudge above the Fed’s target range, at the time raising concerns that the central bank was losing control of interest rates.

The New York Fed also said Monday that it had accepted all $112.9 billion of bids submitted to its overnight repo operations, below the $150 billion that it was offering.

“Our sense is that today’s increase is meant to boost confidence and prevent any future tightening in secured funding, rather than counteracting current pressure,” Barclays wrote.

“Cheap” protection

Barclays wrote that the repo market move offers “cheap” protection and buys the Fed some time to hold off on moving rates further after an emergency cut last week.

Last Tuesday, the Fed abruptly slashed interest rates by 50 basis points. Fed Chairman Jerome Powell explained that policymakers said the coronavirus had risen to the level of a “material risk” to its economic outlook.

“We will get to the other side of this,” Powell said Tuesday. “And I fully expect that [the economy] will return to solid growth and a solid labor market as well.”

After that decision, markets began pricing in a 100% chance of further cuts in the Federal Open Market Committee’s scheduled meeting on March 18.

But Fed officials had hinted last week that the Fed could use its repo market operations as a lever if needed.

“Flexible and ready”

New York Fed President John Williams said Thursday that the central bank was “flexible and ready to make adjustments” to its temporary repo operations “as needed.”

After Saudi Arabia slashed the price of crude oil, the Fed expanded its repo market operations as futures trading forecast a brutal sell-off once U.S. markets opened on Monday morning.

In addition to the overnight repo, the Fed also expanded the size of its two-week term repos from $20 billion to $45 billion.

The repo operations are now back to levels seen in December, when banks sought cash to finance year-end positions. From mid-December through mid-January, the Fed similarly offered $150 billion in overnight repos and $50 billion in two-week term repos.

The Fed has said its temporary open market operations would last “at least” through April. In the meantime, the Fed is still purchasing about $60 billion of short-term Treasury bills a month, which it said intends to maintain through at least the second quarter of this year.

“While we cannot rule out changes to its purchase operations, the increased [repo operations] buy the Fed some time to cut rates further and reconsider QE,” Barclays wrote.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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