Why did the New York Fed intervene?
The reasons behind [borrowing banks’] sudden demand for cash were attributed to a host of technical conditions that converged to drain money out of the system.
There were major cash withdrawals as quarterly corporate taxes came due, at the same time as a surge of US Treasury debt came into the market to finance deficit spending by the federal government.
More generally, more government securities have built up on the balance sheets of private firms these days as the Fed has begun to wind down the massive holdings of Treasury paper it amassed during the global financial crisis — which has also sucked cash out of the market.
“It looks like a lot of cash left the system in recent days and that demand for dollars was greater than the number of dollars in circulation,” said Gregori Volokhine of Meeshaert Financial Services.
To bring rates down, the New York Fed pumped fresh liquidity into the system through repo operations — $53 billion on Tuesday, $75 billion on Wednesday, with another $75 billion planned for Thursday morning.
The event awakened painful memories of the 2008 financial meltdown, when credit markets seized up suddenly as banks feared that borrowers would go bust before repaying.