The Fed is planning other interventions to ease the funding squeeze

The Federal Reserve Bank of New York announced plans to add another $ 75 billion to the US financial system as trading continues on Wednesday, a day after making its first such intervention in more than a decade to relieve funding pressure in short-term lending markets.

The cost of borrowing cash overnight through repurchase agreements, known as repos, rose Tuesday to a full 10 percent, a more than quadrupled increase from Monday morning, according to Refinitive data.

A senior executive at a large US bank said that the sharp rise in the so-called repo rate reflected a "fairly significant shift between financing needs and financing" in a key part of the US money market.

Repos are crucial to the financial system because they allow companies to access cash overnight using US Treasuries as collateral. Ashish Shah, co-chief investment officer for Goldman Sachs Asset Management Fixed Income, described the sudden tightening of the US money market as a "big deal".

“When things like this happen, it increases uncertainty and leaves interest markets. And it is the central banks' job to avoid

”When things like this happen, it increases uncertainty and leaves the interest rate markets undesirable. And that is the job of central banks to avoid, "he said.

The sharp increase in the repo rate created a situation for the Fed in the same way that top politicians met in Washington to make a monetary policy decision because it pushed up the central bank's reference rate. the federal fund rate rose to 2.25 percent, the very top of the central bank that the central bank targets, from 2.1[ads1]4 percent at the end of last week.

In response, the New York Fed, which runs market operations for the central bank, launched an operation for

The New York Fed offered up to $ 75 billion available through a repo auction where the Fed accepts Treasury and other securities as collateral and in exchange The facility had not previously been used on such a scale since 2008.

The bank had to cancel the operation on the first attempt due to of "technical problems". On the second effort, primary dealers – big banks that act as counterparties to the Fed – dropped the $ 53 billion facility.

The operation seemed to have succeeded in calming the money markets. The reporter dropped right after the New York Fed announced the action.

The New York Fed said Tuesday afternoon that it would repeat the operation Wednesday morning within a 15-minute window before 8:30 a.m., again offering to raise up to $ 75 billion in the financial market.

Bank executives and analysts said that several factors were behind the sharp increase in the repo rate. Lender's reserves over legally required amounts have decreased since the Fed closed the bond purchase program in 2014, reducing the amount of cash they are willing to lend through repo operations.

The system came under extra strain in recent days when companies withdrew money to pay tax bills. More money left the system as investors settled state purchases after a recent flare-up.

We believe the culprit is the lack of bank reserves, which is the only asset that gives banks intraday liquidity

"We believe the culprit is the scarcity of bank reserves, which is the only asset that gives banks liquidity day," TD Securities said. The reserves have been declining since 2014, and we expect them to fall further as the Treasury's cash balance increases and the currency in circulation grows. "

A top executive in the repo operation of a major US bank added that recent issues were not the same as the reasons for spikes in overnight lending rates during the financial crisis. "This is a phenomenon in money markets – not something to do with credit quality perceptions in banks or elsewhere," he said.

Additional reporting by Michael Mackenzie, Colby Smith and Robert Armstrong