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The Federal Reserve Bank of New York said Tuesday morning that it would pump as much as $75 billion of funds into short-term financial markets in an effort to relieve pressures that had sent overnight borrowing rates soaring.
The fund will be injected into the market through transactions known as repurchase agreements, in which the Fed temporarily swaps Treasuries and mortgage-backed securities from market participants in exchange for dollars. The agreements are expected to be unwound the following day, although they can be rolled over into new repurchases, or repos, if the market remains stressed.
Hiccup - Fed - Operation - Minutes - Fed
After a brief hiccup that caused the Fed’s operation to be delayed by about 15 minutes, the Fed purchased about $40.8 billion of Treasurys, $11.7 billion in mortgage-backed securities and $600 million in debt of government-sponsored entities.
The massive repo transaction comes after a surge in the price of short-term funding that banks, hedge funds, and other financial institutions rely on to finance their securities portfolios. Repo rates, which typically stay close to the Fed’s target rate, spiked to more than 4 percent. The Fed’s target is currently a range of between two percent and two-and-a-half percent. In recent weeks, the repo rate had been around 2 percent.
Fed - Announcement - Rates - Percent–with - Traders
Before the Fed’s announcement, rates had reached above 5 percent–with some traders saying they saw rates as high as 10 percent.
The reasons for the spike in overnight rates are still unclear. Some analysts have said that the sudden shift in the price of oil after the attack in Saudi...
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