In a rare move, the Fed’s own benchmark fed funds target rate rose to 2.3% on Tuesday, above the target range set when it cut rates at its last meeting in July. The target range was since cut by a quarter point Wednesday to 1.75% to 2% from 2 to 2.25%.
“This just doesn’t look good. You set your target. You’re the all-powerful Fed. You’re supposed to control it and you can’t on Fed day. It looks bad. This has been a tough run for Powell,” said Michael Schumacher, director, rate strategy, at Wells Fargo.
On Monday, there seems to have been a perfect storm in the market, causing a cash shortage. Corporations were seeking dollars for quarterly tax payments, and the Treasury had also issued a large amount of bills, which reduces liquidity. There was also speculation that the attack on Saudi Aramco, which took half its production off line, may have spurred demand as oil spiked and investors feared a Middle East conflict.
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.
U.S. per capita income of $66,900 would be slashed to a negative $4,857 using this measure. That’s a total loss of almost $72,000 for every man, woman and child.