New York (AFP) – The New York Federal Reserve Bank on Tuesday stepped into financial markets for the first time in more than a decade to keep interest rates in line with the Fed’s target.
Analysts say the operation appears to have been successful but it caused some jitters, coming as the Fed’s policy-setting Federal Open Market Committee opens a two-day meeting expected to produce a second cut in the benchmark lending rate.
The New York Fed said the $75 billion in repurchase agreements — known as “repos” — were made “in order to help maintain the federal funds rate within the target range of 2 to 2-1/4 percent.”
Update 4: It’s over: after a torrid 30 minutes in which the NY Fed first announced a repo operation, then announced the repo was canceled due to technical difficulties, then mysterious the difficulties went away just minutes later, at precisely 10:10am, the Fed concluded its first repo operation in a decade, which while not topping out at the $75 billion max, was nonetheless a significant $53.15 billion, split as follows:
- $40.85BN with TSYs as collateral at a 2.1% stop out rate
- $0.6BN with Agencies as collateral at a 3.0% stop out rate
- $11.7BN with Mortgage-backed securities as collateral at a 2.1% stop out rate.
While the Fed did not disclose how many banks participated in the operation, it is safe to say it was a sizable number. Worse, the result from today’s unexpected repo operation, we can now conclude that in addition to $1.3 trillion in ‘excess reserves’, a Fed which is now cutting rates and will cut rates by 25bps tomorrow, the US financial system somehow found itself with a liquidity shortfall of $53 billion that almost paralyzed the interbank funding market.
Most businesses don’t have enough cash on hand to fund their day to day operations so they turn to the repo market for short term loans (24hrs) which they rollover everyday to meet their financing needs. I haven’t followed this closely but I saw something to effect interest rates shot up on repo, basically there wasn’t sufficient liquidity (cash available at a reasonable rate) to serve the market so it starts to lock up. This was the real crisis during the aptly named credit crisis following the collapse of Lehman. The fed stepped in and opened the discount window (I might be inexact on the mechanism of the fed’s interaction here), I don’t think it’s QE because the fed isn’t assuming ownership of assets but merely using them as collateral. Not that it matters QE is garbage.
I guess if they did resume QE that would be a signal of a looming downturn.