(Reuters) - The Federal Reserve Bank of New York on Monday saw the largest demand for overnight loans since it began its daily injections into the banking system last fall, after increasing the size of its operations to ensure an ample supply of bank reserves.
The move comes as several market indicators show rising concern about credit stress as the spreading coronavirus threatens to send the global economy into recession.
Plunging oil prices after Saudi Arabia and Russia signaled they would hike output in a market already awash with crude, added to concerns about the funding of companies exposed to the commodity.
The daily overnight repurchase agreement - or repo - operations will increase to $150 billion from $100 billion and the two-week operations on March 10 and 12 will increase to $45 billion from the current level of at least $20 billion.
The Fed accepted $112.93 billion from primary dealers on Monday, the most since the operations began in September.
The New York Fed said it will continue to adjust repo operations as needed. The announcement comes as financial markets are in turmoil due to concerns about the fast-spreading coronavirus.
Stocks plunged on Monday while U.S. Treasury yields set record lows.
The spread between the Libor and the Overnight Index Swap (OIS) has gapped significantly wider, indicating rising credit concerns.
However, “our sense is that the increase is driven more by deteriorating market sentiment about credit and recession risks than a genuine pullback in unsecured funding markets,” analysts at Barclays Capital said in a report on Monday.
The spread USDL-O0X1=R has widened to 51 basis points, from one basis point on Feb 27.
The U.S. central bank began intervening in money markets in the fall when a shortage of reserves led to a spike in short-term borrowing rates. The Fed also began purchasing $60 billion a month in short-term Treasury bills, a move officials say is part of a technical effort to raise the level of reserves in the banking system.
Policymakers previously said the plan was to scale back the bill purchases and the repo operations in the second quarter, after reaching an “ample” supply of reserves. But demand for the Fed’s repo operations has been elevated in recent weeks and the operations for term repo have been oversubscribed, in a sign that financial firms could be trying to shore up liquidity amid worries about increased market volatility.
Fed officials cut interest rates last week by half a percentage point in their first intermeeting rate cut since 2008 in a move meant to counter the downside economic risks of the spreading coronavirus. The central bank’s target rate is now at a range of 1.00% to 1.25%.
New York Fed President John Williams said in a speech on Thursday that the central bank will do what is needed to make sure there are enough reserves in the system.
“We remain flexible and ready to make adjustments to our operations as needed to ensure that monetary policy is effectively implemented and transmitted to financial markets and the broader economy,” Williams said at a dinner in New York.
Reporting by Karen Brettell and Jonnelle Marte; Additional reporting by Dan Burns; Editing by Chizu Nomiyama and Andrea Ricci