New York Fed steps into market to move interest rates

NEW YORK: For the first time in more than a decade, the New York Federal Reserve Bank on Tuesday pumped billions of dollars into financial markets to keep short-term interest rates in line with the Fed’s target range.

The emergency interventions on money markets – one early Tuesday and another scheduled for Wednesday morning – came as a sudden cash shortage drove up interest rates.

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 borrowing costs across the financial system.

The move came on the eve of a Fed policy decision, which economists widely expect will result in a lower target range as the central bank works to keep the economy growing.

Analysts said earlier Tuesday the first operation appeared to have been successful.

“I think it’s always concerning if the Federal Reserve can’t control the federal funds rate,” Oxford Economics’ Chief Kathy Bostjancic, told AFP.

The New York Fed authorised repurchase agreements – known as “repos” – to provide liquidity in an effort to keep the Fed’s benchmark lending rate “within the target range of 2 to 2-1/4%.” It was the first such operation since September 2008.

Banks can meet the Fed’s cash reserve requirements by borrowing, using the repo agreements in which short-term loans are collateralised with assets such as treasury bills.

But for an array of reasons that converged on Tuesday, the financial system began to run short of cash, including large withdrawals due to corporate tax payments and the reduction in the Fed’s holdings of government securities.

Increased bond sales as the federal government borrows to finance its operations have also helped drain cash from the system.

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, according to Bostjancic.

The numbers suggest US economic activity is slowing down

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