After slowing down the pace of tapering, the Federal Reserve has taken another action to support the liquidity of the financial market by proposing to normalize "early repo".

The Federal Reserve Bank of New York plans to include the early settlement operations of a key liquidity support tool in its regular schedule to enhance and strengthen the liquidity tool and support the smooth operation of financial markets. Earlier, the Federal Open Market Committee (FOMC) in March formally agreed to "significantly slow down" the pace of balance sheet reduction to prevent excessive liquidity from being drawn out of the market. The New York Fed's latest normalization of "early repo" operations can be seen as the Fed's latest move to safeguard market stability and liquidity while Trump's tariff policies lead to continued volatility in the US bond and interest rate markets, stabilizing market liquidity, especially in the repo market. The New York Fed recently also briefly provided additional daily repo operations, including at the end of December and March, to enhance the effectiveness of the SRF. Federal Reserve officials believe there is still room for improvement to ensure that funding liquidity remains adequate. Currently, the Fed is expanding the financial market's liquidity "buffer" through the deceleration of balance sheet reduction and the expansion of the SRF period, possibly aiming to prevent temporary fund mismatch and liquidity shortages that may occur during peak periods of high long-term US Treasury yields or when Trump's administration focuses on fiscal financing, while maintaining a tightening stance on interest rates and preventing the repo market from becoming a weak link in monetary policy transmission, resolutely avoiding a liquidity crisis triggered by operational inertia and lagging information as in 2019. Roberto Perli, who is responsible for managing the New York Fed's securities investment portfolio, stated that adjustments to the schedule of the permanent repo facility - SRF will be made at some point in the near future, allowing eligible banks and primary dealers to exchange US Treasury and government agency securities for overnight funds at a rate set by the Fed. This schedule adjustment will be implemented at some point in the near future. In an interview at the 8th Short-Term Financing Market Conference in Washington on Friday, Perli stated, "In possible future scenarios, Fed staff will continue to look for ways to significantly increase the effectiveness of the SRF." The global financial markets' renewed focus on the SRF comes shortly after a new round of global trade battles initiated by US President Trump in early April led to significant volatility in the US Treasury market. Some investors view the US Treasury market as Trump's "weak spot" and the core focus of the Trump-led US government. Perli stated in the interview that the market dynamics surrounding the trade policy uncertainty in early April were "extremely unsettling" and caused a "real and significant" deterioration in financial market liquidity, but cash-driven financial markets continued to operate normally - partly due to the resilience of the repo market. He said, "This resilience, even in the face of increased volatility in US Treasury yields, may have prevented the forced liquidation of some relatively short-term value trades, which could exacerbate market distortions." However, the New York Fed began providing additional daily repo operations before the drastic bond market volatility last month. These additional repo operations were arranged at the end of December and March, when repo agreement rates often soared due to banks cutting back on market purchase activities to meet regulatory requirements. The target set by the Fed is to prevent repo market rates from exceeding the Fed's target range. According to the minutes of the January Fed meeting, several Fed officials supported finding ways to enhance the effectiveness of the SRF. Even with daily matching operations, Perli stated that there is still significant room for improvement. He pointed out that the repo leg of the SRF operation rates are "significantly higher" than the quoted levels of the facility, currently at 4.5%. Perli stated that trading counterparties have indicated to policymakers that they need to see market rates slightly higher than the SRF rate to be willing to use the facility. He said in the interview, "If money market rates do not fluctuate too much, funding liquidity is more likely to remain ample; this, in turn, depends on the availability and effectiveness of monetary policy implementation tools in ensuring rate control within the Fed's ample reserve framework." Is the New York Fed's move to prevent a replay of the "money crunch" event in 2019? In the latest round of monetary policy adjustments, the Fed on one hand sharply reduced the monthly cap on "balance sheet" reduction from $250 billion to $50 billion, and hinted in its statement that it will continue to "slow down the pace"; on the other hand, the New York Fed recently announced that the "early advance settlement" operation of the permanent repo facility (SRF) will be fixed into the schedule to address the lessons from the significant deterioration in US Treasury liquidity under the tariff impact in early April. The above monetary policy adjustments reflect the Fed's decision-making body's response to the "high interest rates + high long-term yield" financial market environment, by installing a safety valve in advance to prevent potential fund mismatch, in order to avoid a replay of the liquidity crisis and panic selling event in the US repo market in 2019, also known as the "money crunch" event. The FOMC meeting in March emphasized that the government debt ceiling deadlock and tax period fluctuations have made the judgment on reserve adequacy more uncertain, hence agreeing to "significantly slow down" balance sheet reduction to prevent excessive withdrawal of liquidity. The minutes of the meeting showed that several FOMC attendees pointed out that while reserves remained around $3 trillion, some indicators had reached the lower band of the buffer zone, and they needed to avoid approaching the "critical point" of 2019. In the fall of 2023, the 10-year US Treasury bond rate reached or approached a new high of 5% several times, and in 2024-25 under double pressure from inflation and tariffs, strategists still warned that yields could return to that level. Higher long-term rates raise repo financing costs, compress arbitrage trading profits, and increase margin requirements, amplifying the chain risk of "tight funds-> passive deleveraging-> crazy selling of US Treasury bonds." By moving the SRF window forward, the Fed can inject overnight funds before spreads widen significantly, avoiding the entire financial market deviating from the target range. From the most pessimistic perspective, if the 10-year yield surpasses 5% again in the future and widens in sync with the repo spread, or if the SRF bid volume significantly increases, the Fed may further pause the balance sheet reduction and even consider targeted expansion to stabilize the benchmark interest rate corridor in the financial market.