U.S. Overnight Money Markets Cause Feds to Intervene

The Federal Reserve Bank of New York offered up $75 billion to banks in the first auction in a decade after overnight loan rates spiked as high as 10% on Tuesday, according to The Wall Street Journal

The Fed on Wednesday cut its key interest rate by a quarter-percentage point, acting “as appropriate” to sustain the economic expansion. Fed Chairman Jerome Powell said that the central bank would consider further interventions in money markets as needed in the foreseeable future.

The New York Fed then announced that it would offer up to $75 billion of short-term cash loans on Thursday morning. 

Further cuts to the interest rate would help reverse the trend of foreign investors’ reluctance to buy U.S. Treasurys as it becomes increasingly les profitable to fund longer-term U.S. government bonds with short-term borrowing. 

The Fed’s reversal forced the U.S. Treasury to sell more bonds to banks and investors and Mr. Powell noted Wednesday that the level of reserves in the banking system is uncertain. 

“Ultimately, the only way for the Fed to alleviate reserve scarcity and funding stress is to inject liquidity and increase the amount of reserves in the system,” analysts at Morgan Stanley wrote. 

“Market participants are now asking: ‘Is the Fed up to the task of estimating the quantity of reserves required by banks and whether it has the tools to supply them when needed,’” Mark Cabana, the head of U.S. short rates strategy at Bank of America Merrill Lynch, said. 

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