The New York branch of the U.S. Federal Reserve ran its third consecutive cash injection into Wall Street's funding markets Thursday, adding to the $128 billion it has pumped in so far, following yesterday's move to lower benchmark borrowing costs.
Fed Chairman Jerome Powell addressed this week's spike in overnight borrowing costs during his post rate-decision press conference yesterday, noting the impact of tax payments and bond purchases on the systems twenty four primary dealers was "stronger than we expected ... and surprised market participants a lot too." He also hinted at a move towards adding to the Fed's $3.8 trillion balance sheet with more bond purchases in order to smooth bank lending conditions.
The NY Fed got $83.9 billion in bids for the offer $75 billion in cash to broader markets at a rate of 1.7% Thursday, in exchange for eligible collateral such as U.S. Treasury bonds or mortgage-backed securities, in order to hold the Fed's key rate inside its new target range of between 1.75% and 2%. The NY Fed's two previous operations injected $53.2 billion and $75 billion.
"The strains in the money markets reflect forces that we saw coming, and they just had a bigger effect than I think most folks anticipated: strong demand for cash to purchase treasuries and pay corporate taxes," Powell told reporters during a question-and-answer session that followed the Fed's rate decision.
Powell and his colleagues also lowered the rate the Fed will pay on overnight reserves by 0.3%, to 1.8%, in an effort to entice more bank-to-bank lending.
"We took appropriate actions to address those pressures, to keep the Fed Funds rate within the target range, and those measures were successful," he added. "If we experience another episode of pressures in money markets, we have the tools to address those pressures. We will not hesitate to use them."
The $2.2 trillion repo market, a key source of day-to-day financing on Wall Street, was rocked this week by a massive spike in overnight borrowing costs linked to a series of events, including quarterly tax remittances, which drained money market funds, and record Treasury bond issuance.
In fact, primary dealers in the Fed system are taking down nearly $45 billion each day in gross U.S. Treasury bond issuance, and reducing spare cash -- known as excess reserves -- at the same time. Those reserves have fallen by $171 billion so far this year, according to Fed data, and are down $1.4 trillion from peak 2014 levels.
"Going forward, we're going to be very closely monitoring market developments and assessing their implications for the appropriate level of reserves and we're going to be assessing the question of when it will be appropriate to resume the organic growth of our balance sheet," Powell said Thursday. "And I'm sure we'll be revisiting that question during this inter-meeting period and certainly at our next meeting."