Fed adds longer-term cash to U.S. banking system

The Federal Reserve on Tuesday injected longer-term cash into the U.S. banking system in an effort to meet the funding needs of banks and Wall Street following a bout of turbulence in money markets last week.

The New York Federal Reserve added $30.0 billion cash into the banking system through 14-day loans to primary dealers.
These 14-day term repurchase agreements (repo) were on top of the $75 billion in temporary cash through an overnight repo operation.

Primary dealers, or the top 24 Wall Street firms that do business directly with Fed, borrow from the central bank by using their Treasuries and other bonds as collateral.

Their demand for funding was strong with $62 billion in bids submitted for the 14-day operation and $80.2 billion at the overnight operation, data from the N.Y. Fed showed.

A week ago, the Fed started to add large-scale liquidity into the financial system for the first time since the height of the global credit crisis, which a decade ago nearly froze the repo market – a major source of cash for banks and Wall Street.

Last Tuesday, overnight borrowing cost in the $2.2 trillion repo market spiked as high as 10%, which was five times more than what the central bank is targeting now.

Analysts generally blamed a shortage of bank reserves as the culprit for the market turbulence, together with huge seasonal payments for taxes and Treasury supply.

“Clearly the market has stabilized quite a bit,” said Jonathan Cohn, interest rate strategist at Credit Suisse in New York. “The Fed’s quick response to provide liquidity has helped the situation.”