For the first time in more than a decade, the New York Federal Reserve Bank announced Tuesday it was pumping billions of dollars into financial markets to keep short-term interest rates in line with the Federal Reserve's target range.
The operations -- one early Tuesday and another scheduled for Wednesday morning -- came on the eve of a Fed decision that economists widely expect will result in a lower target range.
The target range influences the cost of borrowing across the financial system.
Analysts said earlier Tuesday the first operation appeared to have been successful.
The New York fed authorized $75 billion in repurchase agreements -- known as "repos" -- in an effort to keep the Fed's benchmark lending rate "within the target range of 2 to 2-1/4 percent."
The New York Fed conducts regular market operations with government securities dealers as a way of implementing the policy set by the Fed's rate-setting Federal Open Market Committee.
But on Tuesday, as demand for cash rose amid falling bank reserves, the rate had moved to the top of the current range.
Bids in the short-term financing markets on Tuesday hit as high as five percent, well above the current 2-1/4 percent upper bound of the Fed's target range, The Wall Street Journal reported, citing traders.
'RIPPLE EFFECT'
Kathy Bostjancic, Oxford Economics' chief US financial economist, told AFP earlier Tuesday there had been a "tsunami" of technical factors driving the demand for funds and pushing rates out of whack but the big injection helped.
It was the first such operation since September 2008.
"Any time the plumbing acts up it's a concern and it has a ripple effect throughout money markets," Bostjancic said, adding that reserves helped with the "dislocation in the repo market."
She explained that technical factors including September payments of corporate taxes, as well as a huge quantity of Treasury debt issuance, created the drop in bank reserves.
US lawmakers' delay in raising the federal debt ceiling earlier this year caused a backlog in Treasury debt issues since the government was not able to raise more funds. Treasury has had to play catch up, she said.
"So there is a lot going on. It's technical and it all kind of came together at once," she said, adding that the New York Fed has been "behind the curve in trying to estimate how much reserves should be in the system."
source: news.abs-cbn.com
