The Fed made a $70 billion reserve injection today in two operations in response to a sharp increase in the Fed funds rate, indicating bank reluctance to lend to each other. One reader informed us the rate was 3.75% mid-morning after the first, $20 billion addition (versus the 2% target level) and according to Bloomberg reached as high as 6% before the second Fed move.
The Federal Reserve added $70 billion in reserves to the banking system, the most since the September 2001 terrorist attacks, to keep bank borrowing costs low after the bankruptcy of Leman Brothers Holdings Inc.
Fed funds traded as high as 6 percent, or 4 percentage points above the central bank’s target rate for overnight loans between banks, according to ICAP Plc, the world’s largest inter- dealer broker. The margin is the greatest since Bloomberg began tracking the data in 1998…
The central bank uses repurchase agreements, or repos, to buy or sell Treasury, mortgage-backed and so-called agency debt for a set period, to help maintain enough money in the system to keep overnight interest rates close to the target. They don’t signal a policy shift. Futures show traders boosted odds to 68 percent that the Fed will cut rates when policy makers meet tomorrow to offset financial market turmoil.
“If the fed funds rate closes high today, I would be really worried as it would mean that there really is no money out there to be lent,” said Stan Jonas, who trades interest- rate derivatives at Axiom Management Partners LLC in New York.
The so-called effective funds rate was 2.1 percent on Sept. 12, or 10 basis points over the target rate….
The Fed added $50 billion in temporary reserves to the banking system when it arranged overnight repurchase agreements, or repos, at 11:50 a.m., after providing $20 billion earlier.
“It is rare that overnight operations exceed $15 billion,” Tony Crescenzi, chief bond market strategist for New York-based Miller Tabak & Co., wrote in a note. “There is a longstanding pattern in which the funds rate falls in the afternoon, as banks scramble to unload their excess monies onto other banks, lest they get stuck with excesses earning nothing.”
When the Fed added the reserves at 9:40 a.m., federal funds, the overnight lending rate between U.S. banks, traded at 4.25 percent, above the central bank’s target rate, according to ICAP. The rate was 6 percent at the time of the second open market operation. Fed funds opened at 3.5 percent today.
A total of $5 billion in repos matures today. Wrightson, an ICAP research unit specializing in U.S. government finance, had expected the Fed to add about $15 billion in repos