For a second day, the New York Fed spent billions to calm the financial market
By Matt Egan, CNN Business
Updated 6:08 PM ET, Wed September 18, 2019
New York (CNN Business)For the second straight day, the New York Federal Reserve injected a huge sum of money into the financial system in a bid to calm stress in the overnight lending market.
The Fed on Wednesday poured another $75 billion into the market following a $53 billion rescue by the NY Fed on Tuesday. Overnight lending rates have suddenly spiked, and the Fed is acting to bring them back down to keep markets functioning smoothly.
Until this week, the Fed hadn't launched an operation like this since 2008.
Federal Reserve Chairman Jerome Powell said during a press conference on Wednesday that these steps were "effective in relieving funding pressures."
Still, the fact the Fed needed to pump $128 billion into the system on successive days shows that a crack has emerged in a seldom-discussed corner of Wall Street that is central to the global financial system. It also raises concerns that the Fed is losing its grip on the short-term rates the central bank is supposed to control.
"It shows you the plumbing is broken," said Michael Block, market strategist at Third Seven Advisors. "It's nice they are recognizing this and that they have safety valves."
To fix it, the NY Fed launched a pair of "overnight repo operations," during which the central bank aims to ease pressure by purchasing Treasuries and other securities.
Rates spiked to 10% before rescue
On Wednesday, the NY Fed submitted $80.1 billion of purchase orders, of which $75 billion was accepted. The aim is to keep borrowing rates from climbing sharply above the Fed's target range, which was set at 2% to 2.25% in late July. The Fed on Wednesday lowered rates to a range of 1.75% to 2%.
The overnight lending rate spiked to a high of 10% on Tuesday before the NY Fed stepped in. It has since tumbled below 3%, which is still above the Fed's target range.
Powell acknowledged "elevated pressures" in markets, but expressed confidence this won't have an impact on the economy.
"While these issues are important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy," Powell said.
The overnight market is overshadowed by the Dow, the S&P 500 and even the 10-year Treasury rate, but it plays a critical role by allowing banks to borrow cheaply for brief periods. They often turn to this market to buy bonds, especially US Treasuries.
The spike in rates brought back bad memories of 2008, when this market broke down, but analysts don't believe this is a repeat. Back then, overnight rates spiked because banks were scared to lend to each other. No one knew who would survive the financial crisis. Today, banks have repaired their balance sheets and are hauling in massive profits.
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