After slowing down the pace of balance sheet reduction, the Federal Reserve takes further action to safeguard liquidity in the financial markets: plans to normalize "early repurchase."

According to Zhitong Finance APP, the Federal Reserve Bank of New York plans to incorporate early settlement operations of a key liquidity support tool into its regular schedule to enhance and strengthen this liquidity tool and support the smooth operation of financial markets.

Previously, the Federal Reserve's FOMC officially agreed in March to "significantly slow down" the pace of balance sheet reduction to prevent excessive liquidity from being withdrawn from the market. The New York Fed's latest normalization of the "early repurchase" operation can be seen as the Federal Reserve's latest measure to safeguard market stability and ensure ample liquidity, striving to stabilize market liquidity, especially the resilience of the repurchase market, amid the volatility caused by the tariff policies led by Trump.

Recently, the New York Fed also briefly provided additional daily repurchase operations, including at the end of December and the end of March, to enhance the effectiveness of the Standing Repo Facility (SRF). Federal Reserve officials believe there is still room for improvement to ensure that liquidity remains sufficient.

Currently, the Federal Reserve is expanding the "insurance layer" of liquidity in the financial market through slowing down balance sheet reduction and extending the SRF period, possibly aiming to prevent short-term mismatches and liquidity shortages that may occur during high long-term U.S. Treasury yield fluctuations or peak U.S. Treasury financing periods, while maintaining a tightening interest rate stance without allowing the repurchase market to become a weak link in monetary policy transmission, firmly avoiding liquidity crisis events triggered by operational inertia and information lag as seen in 2019.

Roberto Perli, who manages the New York Fed's securities portfolio, stated that adjustments to the corresponding schedule of the Standing Repo Facility (SRF) will be made at some point in the "near future." This tool allows eligible banks and primary dealers to exchange overnight funds for U.S. Treasury and government agency securities at rates set by the Federal Reserve, and this scheduling adjustment will be implemented at some point in the "near future."

He mentioned at the eighth Short-Term Financing Market Conference held in Washington on Friday: "In potential scenarios, Federal Reserve staff will continue to look for ways to significantly enhance the effectiveness of the SRF."

The renewed global financial market focus on the SRF came shortly after a new round of global trade battles initiated by U.S. President Trump in early April, which triggered significant volatility in the U.S. Treasury market. Some investors view the U.S. Treasury market as Trump's "soft spot" and a core focus of the Trump-led U.S. government.

Perli stated in an interview that the market movements surrounding the uncertainty of trade policies in early April are "very unsettling" and have caused a "real and significant" deterioration in financial market liquidity. However, the financial market, led by liquidity cash, still maintains normal operations—partly thanks to the resilience of the repurchase market.

He remarked: "This resilience, even amid increased volatility in U.S. Treasury yields, may have prevented the unwinding of certain shorter-term relative value trades, which would otherwise exacerbate market distortions." However, the New York Federal Reserve had already begun providing additional daily repurchase operations before the severe fluctuations in the bond market last month. These additional repurchase operations are scheduled for the end of December and the end of March, when repurchase agreement rates often spike due to banks reducing market purchasing activities to meet regulatory requirements.

The target interest rate set by the Federal Reserve aims to prevent the overall repurchase market rates from exceeding the Federal Reserve's target range. According to the minutes from the January Federal Reserve meeting, several Federal Reserve officials supported finding ways to enhance the effectiveness of the Standing Repo Facility (SRF).

Even with corresponding operations conducted twice daily, Perry stated that there is still considerable room for improvement. He noted that the rates in the tri-party repurchase segment of the SRF operation are "significantly higher" than the quoted level of this facility, currently at 4.5%.

Perry mentioned that counterparties have told policymakers that they need to see market trading rates slightly above the SRF rate before they are willing to use this tool.

He stated in an interview: "If money market rates do not fluctuate too much, the liquidity of financing funds is more likely to remain ample; this, in turn, depends on the availability and effectiveness of monetary policy execution tools within the Federal Reserve's ample reserves framework to ensure interest rate control."

Is the New York Fed's move aimed at preventing a repeat of the 2019 'cash crunch' event?

In the latest round of monetary policy adjustments, the Federal Reserve has, on one hand, sharply reduced the monthly "balance sheet reduction" cap from $25 billion to $5 billion, and hinted in its statement that it will continue to "slow down"; on the other hand, the New York Fed has recently announced that it will fix the "early termination" operations of the Standing Repo Facility (SRF) into its schedule to address the lessons learned from the significant deterioration in U.S. Treasury liquidity under tariff shocks in early April.

The above monetary policy adjustments reflect the Federal Reserve's decision-making body preparing a safety valve in advance for potential funding mismatches in the "high interest rates + high long-term yields" financial market environment, to avoid a repeat of the liquidity depletion and panic selling events in the U.S. repurchase market in 2019, also known as the "cash crunch" event.

The FOMC's March meeting emphasized that the deadlock over the government debt ceiling and tax period fluctuations make the assessment of reserve adequacy more uncertain, thus agreeing to "significantly slow down" the balance sheet contraction to prevent excessive liquidity withdrawal. The meeting minutes showed that several FOMC participants pointed out that although reserves remain high at about $3 trillion, some indicators have reached the lower edge of the buffer zone, and it is necessary to avoid approaching the "critical point" of 2019.

In the fall of 2023, the 10-year U.S. Treasury yield repeatedly touched or approached a 16-year high of 5%, and strategists warned that under the dual pressures of inflation and tariffs in 2024-25, yields could return to that level. Higher long-term rates raise repurchase financing costs, compress arbitrage trading profits, and increase margin demands, amplifying the chain risk of "tight funding → passive deleveraging → frantic selling of U.S. Treasuries." By advancing the SRF window, the Federal Reserve can inject overnight funds before the spread rapidly widens, preventing the entire financial market from deviating from the target range.

From the most pessimistic perspective, if the 10-year yield breaks above 5% again in the future and widens in sync with the repurchase spread, or if the bidding volume for the SRF significantly rises, the Federal Reserve may further pause the balance sheet reduction or even consider targeted balance sheet expansion to stabilize the benchmark interest rate corridor in the financial market