Fed injects over $100bn after key borrowing rate hits all-time high
Pressure on a crucial US money market has eased after the Federal Reserve injected $75bn (£60bn) following a spike in short-term borrowing rates to record highs.
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Borrowing costs in the repurchasing – or repo – market soared to as high as 10 per cent on Tuesday morning, pushing the US’s main interest rate to above the Fed’s target level of two to 2.25 per cent.
In the repo market, institutions lend to each other overnight using US government bonds as collateral. It is vital to the working of the global financial system, helping banks to fund their daily operations. Its failure was a key part of the 2008 financial crisis.
Problems in the repo market on Tuesday caused the Fed to hand out $53bn to firms and banks, but more was needed this morning. In an auction, financial firms took $75bn of Fed money to meet their short-term needs.
The move helped lower overnight borrowing costs to between 2.25 and 2.6 per cent by 3pm UK time. This was still above the Fed’s target rate, however, raising the possibility of further action.
Analysts have suggested a number of reasons for the surging costs in the key repo market. Firms had pay quarterly tax bills this week, lowering the amount of money around, while they also had to pay for the $78bn of bonds bought from the government last week.
Meanwhile, the pile of cash stored at the Fed by banks and firms has been steadily declining as the central bank has reduced its huge portfolio of bonds.
“The Fed pulled out an old gun,” said Ipek Ozkardeskaya, senior market analyst at London Capital Group.
It used “open market operations” to give firms cash on a short-term basis. Ozkardeskaya said the tool was “commonly used” before the Fed began its huge bond-buying programme in 2008.
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The Fed’s actions came as they prepared to set interest rates at 7pm UK time this evening. Ozkardeskaya said the chances of the Fed relaunching its bond-buying programme have risen, while “the probability of a 50 basis point [0.5 percentage point] Fed rate cut rose up to 19 per cent, from nearly zero percent at the beginning of this week”.
(Image credit: Getty)