In more than a decade for the first time, this week the US central bank, stepped into economic markets to keep interest rates on short-term lending from popping over its target range.
On Tuesday and Wednesday, The New York Federal Reserve Bank conducted money market interventions as well as planned another for Thursday morning, as a cash crunch drove up the price of borrowing for banks that need to refill the reserves they hold at the central bank.
Monetary institutions use money markets to borrow for very short periods like from one day to a year, a vital function to keep the gears of the financial system running. In so-called ‘repo’ agreements, banks borrow by putting up assets such as Treasury notes as security and then pay back the loans with interest the next day. This lets them stock up the cash holdings they keep at the central bank at any time the amount falls below the requisite minimum set by the Fed.
Normally, money market interest rates track strongly with the target range that the Fed sets for the federal funds rate, scale lending rate that influences borrowing rates all through the worldwide economy.
Why did the New York Fed mediate?
On Monday afternoon, money market rates started to jump, hitting as high as 10% in few cases and surprise the traders. The reasons behind the swift demand of borrowers for cash were attributed to a host of technological conditions that converged to use up money out of the system.
Gregori Volokhine of Meeshaert Financial Services said, ‘It seems like, in recent days, a lot of money left the system and that demand for dollars was greater than the number of dollars in circulation.’