Fed Expands Repo Facility Hours After April Tariff Shock, Reinforces Liquidity Readiness Without Direct Intervention

An official from the Federal Reserve shared insights on how markets dealt with the stress experienced in April, particularly following the announcement of substantial trade tariffs by the Trump administration. Roberto Perli, the manager of the Fed’s System Open Market Account, highlighted that despite early strains in Treasury cash markets, the financial system remained resilient. The Treasury repo market played a crucial role in maintaining liquidity during this period, which helped ensure that these markets continued to function effectively.

Fed Plans Expanded SRF Operations to Enhance Liquidity Support During Market Stress

Perli emphasized that the experience from last month’s market stress underscored the importance of the Federal Reserve’s ability to provide liquidity quickly when needed. He pointed out that the central bank’s efforts during this period reaffirmed the necessity for exploring additional measures to support market liquidity. This includes expanding the use of tools such as the Standing Repo Facility (SRF), which allows firms to exchange Treasury securities for cash to address liquidity needs in financial markets.

In response to feedback from the financial community, Perli revealed that the Federal Reserve is planning to expand the hours of operation for the SRF. Starting soon, the SRF will be available for use in the morning in addition to its existing afternoon operations. These early-settlement auctions, combined with the afternoon auctions, are expected to enhance the effectiveness of the SRF in both supporting the functioning of markets and aiding in the implementation of monetary policy.

Fed Expands SRF Operations to Ensure Liquidity, But Maintains Non-Intervention Stance

The SRF, which was introduced to provide a reliable mechanism for converting Treasury securities into cash, has been somewhat underutilized since its launch. During the market turbulence in April, the facility was not needed in large quantities, as market participants were able to navigate the stress without requiring substantial Fed intervention. However, the Fed’s decision to increase SRF operations aligns with market expectations, especially during high-stress periods, and seeks to ensure smoother functioning of financial markets.

Despite the market volatility last month, the Federal Reserve chose not to intervene directly to support the markets. Fed Chairman Jerome Powell had previously stated that while there was significant volatility, the markets maintained an orderly course, which reduced the necessity for Fed action. He indicated that it would take an extraordinary situation to justify the central bank’s direct involvement, reinforcing the Fed’s stance of acting only when absolutely necessary to ensure market stability.