If $53 billion doesn’t work, try $75 billion more.
The Federal Reserve injected $75 billion into U.S. money markets today after yesterday’s injection of $53 billion didn’t solve the problem.
The problem is that the big Wall Street banks are finding that digesting a huge load of new Treasury debt is leaving them without enough cash–AKA liquidity. That pushed the rates in short-term markets where banks could find the cash they needed skyhigh–up to 10% in the repo market last week–and has even sent the effective Fed Funds rate, the central bank’s benchmark interest rate, to 2.30% yesterday. That’s above the Fed’s target range of 2.00% to 2.25%.
Which, worryingly, raises questions about the possibility that the Fed has lost control of short-term interest rates. The central bank can’t let that worry grow–hence the $128 billion injected into the short-term money market through Fed purchases of short-term instruments.
All this comes as the Federal Reserve’s Open Market Committee is set to announce its decision on interest rates–cut or unchanged–this afternoon.
There are some signs that the injection of so much cash is having some effect. The rate for general collateral repurchase agreements has dropped to 2.175%, down from Tuesday’s record high of 10% and about where it was last week.
But now Wall Street wants to know what permanent measures the Fed will put in place to assure liquidity in these short-term markets. Flooding the market with billions in reaction to a big spike in rates feels like a quick fix reaction to a crisis. Which, of course, has the effect of emphasizing that there is a crisis.
The Fed might speak to some of those permanent measures this afternoon. One would be to expand the Fed’s balance sheet–which might come too soon after the Fed’s decision last year to reduce the size of its balance sheet. Another might be adjusting the interest rate on excess reserves, or IOER. Cutting benchmark interest rates, as the financial markets expect, won’t address this liquidity problem.
The fact that Tuesday’s $53 billion injection of liquidity didn’t work–and required a second $75 billion move just hours later–is widely seen as a sign of deep structural problems in U.S. money markets created by Treasury’s sale of huge amounts of bills, notes, and bonds to fund a Federal budget deficit that is surging past $1 trillion.