It’s a step taken by the NY Fed, the Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States, for the rescue with a special operation focused on facilitating stress in financial market and before that to be done the New York Federal Reserve was compelled by the peg in sudden and overnight borrowing rates.
It is a fully unprecedented incident in this post-crisis era. According to the plan, an ‘’overnight repo operation’’ got launched by the NY Fed and the bank was buying Treasuries and securities meanwhile the operation with an eye to easing arc in markets. The purpose of the system is to pump money to keep borrowing costs.
NY Fed injected $53 million into the system after a few while of the first attempt dismissal. A talk emerged that the Federal Reserve might be losing its grip on short-time rates. The funding markets are torment. Another attempt at repurchasing up to an additional $75 billion was disclosed by NY Fed later on Tuesday.
Rivet of Rates
The target range of NY Fed was well above as the rate on overnight repurchase agreements hit 5% on Monday and the surge continued Tuesday with the overnight rate hitting a high of 10%. The overnight market has a good priority in modern finance. The systems help bankers borrow money in the easy way and quickly. But the market came to an end during the 2018 financial crisis.
At that time people was thoughtful about the financial health of banks and recently they changed their way of record profits and balance sheet.
Deficits and Payment
Cabana who is famous as an analyst of Bank of America blamed Fed saying they made mistake in policy in the spike in overnight lending rates. He said they debased the amount of cash required to keep the financial system operating glossily.
There is dearth of cash in the banking system to meet all of their liquidity and regulatory needs. With a view to making quarterly tax payments to the US Treasury Department, US companies lifted up a large sum of money from banks. The Federal deficit has reached $1 trillion this fiscal year which was happened because of the tax cuts and surge in government spending.
The leaping to the issuance of Treasury leaded to an increase in demand for short-time financing.
Come-back of QE
Additional Fed action is required in this time. Lowering the interest the Fed pays on excess bank reserves may also be required. Expansion of balance sheet by purchasing Treasuries by the Fed is expected by Barclays and Bank of America. With a view to keeping borrowing costs much low, QE, Fed’s bond buying program, got launched during the financial crisis. The fed began shrinking their balance sheet after the economy healed. Cabana thinks the Fed will be working the same way without calling the QE.