US Federal Reserve injects billions into lending markets after 10% lending spike
The US Fed has been forced into dramatic action — for the first time since the global financial crisis — after a shock spike in lending rates.
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A cash shortage has prompted the New York Federal Reserve to pump billions of dollars into overnight lending markets.
The central bank poured another (US) $75 billion into the market on Wednesday following a $53 billion rescue on Tuesday as interest rates soared and threatened to break out of the bank’s target range.
The $128 billion injection — a bid to calm markets — was the most drastic move by the bank since the chaos of the 2008 global financial crisis.
Lending rates spiked to 10% before the rescue, before dropping back to below 3%. The Fed aims to keep the overnight lending rate between 1.75% and 2%.
The overnight market is used by banks to borrow cheaply for brief periods of time.
A sharp decline in the amount of cash reserves in the system, as US companies make tax payments to the US Treasury Department, has been blamed for the soaring lending rates.
“The amount of cash in the banking system is too limited,” rate strategist at Bank of America Merrill Lynch, Mark Cabana, said in a note to clients on Tuesday.
The US Federal Reserve also announced a cut to its benchmark interest rate for the second time this year but the policy committee was divided, with three of the 10 voting members dissenting.
The Fed’s policy-setting Federal Open Market Committee lowered the policy interest rate by 25 basis points to a target range of 1.75 to 2.0 per cent, as expected, and has now pulled back on half of the four interest rate increases in 2018.
“Although household spending has been rising at a strong pace, business fixed investment and exports have weakened,” the FOMC said in a statement.
The Fed cuts rates in July, which was its first in more than a decade.
However, US President Donald Trump blasted the Federal Reserve Chair Jerome Powell as a “terrible communicator,” after the US central bank’s rate cut was less generous than what Mr Trump wanted.
“Jay Powell and the Federal Reserve Fail Again,” the president tweeted. “No ‘guts,’ no sense, no vision!”
Jay Powell and the Federal Reserve Fail Again. No “guts,†no sense, no vision! A terrible communicator!
— Donald J. Trump (@realDonaldTrump) September 18, 2019
The president has called for the federal funds rate to be near-zero, rather than the range of 1.75 per cent to 2 per cent set by the Fed.
Mr Trump has remarked that other countries such as Germany have an advantage because their interest rates are negative, even though negative rates are a sign that those economies are in a recession and may struggle to grow in the longer term.
While officials continue to believe the most likely outcome is for the economy to continue to grow and inflation to gradually increase, “uncertainties about this outlook remain.”
Mr Powell and other Fed officials frequently have cited the uncertainty generated by Mr Trump’s trade war with China which is hanging over the economy.
The Fed also cut the interest it pays to banks on cash reserves above the required level by 30 basis points to 1.8 per cent, in a bid to push more cash into markets.
One member of the Fed wanted an even steeper rate cut, while two others opposed cutting rates.
The Fed’s quarterly economic forecast also reflects the division among central bankers, as the median forecast calls for no further rate increases through the end of 2020 — holding at 1.9 per cent down from 2.4 per cent in the June forecasts.
That contradicts most private economists who expect the central bank will feel the need to provide at least one more reduction in interest rates in 2019.
But it reflects the fact that five members expect or prefer a rate hike, five see no change, and seven forecast or want to see another rate cut.
And that division comes even as the median forecasts for growth an unemployment are about steady, with inflation gradually rising to the Fed’s target of two per cent.
Originally published as US Federal Reserve injects billions into lending markets after 10% lending spike
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