Plumbing issues

17 September 2019 By John Foley Follow @johnsfoley

The U.S. Fed pumped in $53 bln to calm interbank lending after rates spiked. The movements were dramatic, but the many causes look mostly mundane. Banks might use the ructions to argue they deserve a regulatory break. Such ripples, though, can be tolerated, and may have to be.

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The U.S. central bank injected $53 billion into the financial system on Sept. 17 in response to a rate spike in the repo market, which banks use to lend to each other in exchange for securities like Treasury notes.

The Federal Reserve added the funds through an overnight repurchase operation, which allows banks to swap low-risk, highly liquid securities for cash. It offered $75 billion, though the eventual demand was less. It said it would repeat the process on Sept. 18.

After the repo rate hit 10%, according to Refinitiv data, the federal-funds rate, at which institutions lend to one another overnight on an unsecured basis, hit the top of the 2%-2.25% band that the central bank targets.

The Fed began its two-day policy meeting on Sept. 17. Traders were predicting that it would reduce its policy rate by a quarter of a percentage point to a range of 1.75% to 2% on Sept. 18, Reuters reported.

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