NEW YORK (AFP) — The New York Federal Reserve Bank for the second consecutive day pumped money into U.S. financial markets to keep short-term borrowing rates from breaking out of the central bank’s target range.
The emergency interventions on money markets came as a sudden cash crunch drove up interest rates, with banks scrambling to replenish reserves.
The shortage threatened the Fed’s control over a crucial tool it uses to transmit monetary policy to the wider economy, as the target range helps set all types of lending rates, including car loans and mortgages.
Unlike the so-called repo operation on Tuesday, when only $53 billion of the $75 billion offered amount was used, on Wednesday the New York Fed received $80 billion in requests — more than the amount available.
The aim is to keep the overnight lending rate in the Fed’s target range of 2.0% to 2.25%.
The latest repo operation — Tuesday’s was the first in 11 years — came hours before the Fed’s policy-setting Federal Open Markets Committee was expected to cut its benchmark interest rate for a second time this year in an effort to help keep the economy growing amid the trade war with China that is weighing on growth.
The decision was due at 2 p.m. in New York, and Fed Chair Jerome Powell was to hold a news conference after the announcement to offer comments on the rationale behind the decision.
He likely will be asked about the glitches in the money market.
Banks can meet the Fed’s cash reserve requirements by borrowing, using the repurchase agreements in which short-term loans are collateralized with assets such as Treasury bills or mortgage-backed securities.
The financial system began to run short of cash due to a convergence of factors, including large withdrawals due to corporate tax payments and a surge in government debt issues.
Economist Jim O’Sullivan of High Frequency Economics said the cash crunch was “related to the timing of Treasury issuance and quarterly tax payments.”
He cautioned that the pressures “are likely to be more frequent as the amount of bank reserves keeps shrinking and Treasury borrowing keeps rising.”
As a result, “calls for the Fed to introduce a standing repo facility are likely to increase,” O’Sullivan said in an analysis.
© Agence France-Presse