Why is the Fed pumping money into the banking system?

Posted by freemexy on September 23rd, 2019

The Federal Reserve's aim was to stabilise what is usually a calm part of the market.To get more economy news, you can visit shine news official website
Interest rates in the so-called "repo market" had shot up to 10% in some cases - although the cost of borrowing in that market more typically hovers around the benchmark rate set by the Fed - around 2%.
So what happened and should we worry?
First things first: what's the repo market?
Banks, hedge funds and other players borrow money regularly on a short-term basis to ensure their books are in order, no matter what their daily activities.
The borrowers typically offer government bonds or other high quality assets as collateral, which they repurchase, plus interest, when they repay the loan - often the next day.
Those repurchase agreements give the repo market its name.
What happened this week?
This is a huge market, with some tn changing hands each day, according to the US Office of Financial Research.
Under normal conditions, interest rates in the repo market are low, since the loans are considered safe and there's plenty of cash on hand.
But this week the cost of borrowing shot up - toward 10% in some cases. And the rate at which banks lend to each other - the Fed's benchmark - exceeded 2.25%, the top of its desired range.
The rise prompted the Fed to take action. Four times this week, it injected money into the market, offering to buy up to bn in treasuries or other assets from banks in a bid to boost bank reserves and keep them lending.
Why did the rates suddenly spike?
Strains in the repo market were among the first signals of trouble ahead of the 2008 financial crisis. Back then banks had suddenly become wary of lending, worried there were unforeseen risks associated with assets that had previously been considered safe.
This time, analysts think what's happening is caused by an issue with money supply.Money has been sucked out of the market by two events that happen to have coincided. The first is a tax deadline which means firms need cash to pay what they owe the taxman. The second is the due date for payments on a recent offering of government bonds.
On top of that the Fed has also been steadily reducing the overall supply of money in the market, aiming to get conditions closer to how they were before the financial crisis.
Is that the mystery solved then?
A lot of people still don't think those explanations are enough to explain the scale of the interest rate rise.
"The thing that's really confounding is just how much rates moved in a short time," says Zachary Griffiths, rate strategist at Wells Fargo.
"Everyone's kind of trying to get a firmer grasp... on all the different nuances that could have led to such a big move."
There could be other one-off factors triggering this spike, such as an oil bet that went bad after the attack on Saudi Arabia, says Priya Misra, head of global rates strategy at TD Securities.
But she notes that the repo market also showed signs of stress in April and December, suggesting an underling structural issue - namely that the Fed has gone too far in reducing reserves.
"We are in uncharted waters," she says. "The Fed is trying to figure out the appropriate level of excess reserves."