- REUTERS/Ann Saphir
- Short-term rates shot up as high as 10% early this month, threatening to disrupt the bond market and the overall lending system.
- The Fed has conducted special operations several times after that in an attempt to keep interest rates in the intended range.
- To avoid such risks, the New York Fed chief said the central bank could consider the implementation of an ongoing facility for overnight repurchase agreements.
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After injecting hundreds of billions of dollars into financial markets in recent weeks, the Federal Reserve could soon take steps toward a more permanent solution to stave off trouble in money markets.
The Fed has conducted special operations several times throughout September in an attempt to keep interest rates in the intended range, the first time it had taken such actions since the financial crisis a decade ago. Short-term rates shot up as high as 10% early this month, threatening to disrupt the bond market and the overall lending system.
In an interview with the New York Times published Sunday, New York Fed President John Williams said the central bank could consider the implementation of an ongoing facility for overnight repurchase agreements, or repos, to avoid such risks in the future.
“We are seeing that liquidity doesn’t move around as easily in these situations, which means that if we want interest rates to stay kind of on their own in a narrow range, that we have to make sure we have that amount of reserves to support that,” Williams said.
A shortage in the amount of cash banks had on hand for short-term funding needs began to dry up in early September after businesses had to pay quarterly tax bills at the same time that the Treasury issued billions in new bonds.
“As we think about permanent solutions, the big issues, I think, are: what is the right level of reserves,” he said.
The central bank said this month it would offer a series of daily and 14-day term repos for an aggregate amount of at least $30 billion each. It also announced daily repos for an aggregate amount of at least $75 billion each until October 10.
In a statement, policymakers added that they planned to continue to “conduct operations as necessary to help maintain the federal funds rate in the target range, the amounts and timing of which have not yet been determined.”
The Fed drew criticism for what some economists and analysts perceived as a slow response to a situation that they said could have been avoided. Williams pushed back against those assessments, along with questions over whether recent leadership changes added to issues.
“It was all hands on deck. Everyone was working tirelessly to understand what was happening,” Williams said. “The team operated magnificently, there was no delay, there was no hesitation – there was no, in any way, feeling that people weren’t sharing and discussing things very quickly.”
The policy-setting Federal Open Market Committee cut its benchmark interest rate to a target range of between 1.75% and 2% in mid-September. Fed Chairman Jay Powell said the interventions had been temporary and that rates were expected to return to the target range.
“Funding pressures in money markets were elevated this week, and the effective federal funds rate rose above the top of its target range,” he said. “While these issues are important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy.”