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Fed funds decline as central bank adds $50 billion

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Bloomberg New York
Last Updated : Jan 29 2013 | 2:16 AM IST

The Federal Reserve added $50 billion in temporary reserves to the banking system, pushing down the rate for overnight loans between banks to spur lending and ease a crisis of confidence in financial markets.

The fed funds rate declined as low as 2 per cent, after opening at 3.75 per cent, according to ICAP Plc, the world's largest inter-dealer broker. The rate has climbed back to 4 per cent. The Fed added $70 billion in cash yesterday, the most since the September 2001 terrorist attacks, to bring borrowing costs down after the bankruptcy of Lehman Brothers Holdings Inc triggered a hoarding of cash.

Central banks from Tokyo to Frankfurt also injected more than $160 billion into their financial systems today in a bid to calm markets. Banks' demand for cash rose after American International Group Inc had its credit ratings cut by Standard & Poor's and Moody's Investors Service late yesterday, threatening efforts to raise funds to keep the company afloat.

“Banks' balance sheets are severely damaged and therefore the need for cash is very, very high,” said Piyush Goyal, an interest-rate derivatives strategist at Barclays Capital Inc in New York. “The need for cash outstrips anything that the Fed is able to do. These are extraordinary times.”

The cost of borrowing in dollars overnight more than doubled to the highest since 2001. The London interbank offered rate, or Libor, soared 3.33 percentage points to 6.44 per cent, according to the British Bankers' Association. The rate was as low as 2.07 per cent in June.

Rate Cut Speculation: Funds traded to as high as 7 per cent yesterday, or 5 percentage points above the Fed's target rate, according to central bank data. That margin was the greatest at least since Bloomberg began tracking the data in 1998. The rate closed at 0.25 per cent yesterday, and reached as low as 0.01 per cent.

The Fed will lower its target rate by at lease a quarter-percentage point to 1.75 per cent, futures trading showed. Contracts on the Chicago Board of Trade put the odds on a cut at 98 per cent, compared with 2 per cent a week ago. Of the 105 economists surveyed by Bloomberg News, 100 expect the Fed to leave rates unchanged today.

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The European Central Bank awarded ¤70 billion ($99.8 billion) in a one-day money-market auction today. The Bank of Japan added a total of 2.5 trillion yen ($24 billion) and the Bank of England pumped in £20 billion ($36 billion). Counterparts in Australia and Switzerland took similar steps.

‘Safety Net’: “The safety net that the Fed has been throwing out there is pretty wide,” said George Goncalves, chief Treasury and agency debt strategist in New York at Morgan Stanley., the second-biggest US securities firm.

The Fed added the reserves through overnight repurchase, or repo, agreements. They don't signal a policy shift.

In repos, the Fed buys US Treasury, mortgage-backed and so-called agency debt from its 19 primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers, and the cash to the Fed.

The Fed also auctioned $20 billion in 28-day repos for mortgage-backed securities for one-day forward delivery, according to a statement posted this morning on the NY Fed's Web site.

The forward transactions, done each Tuesday, are part of the Fed's so-called Single-Tranche OMO Program. Under the program announced March 7, the Fed agreed to make up to $100 billion available through weekly 28-day repurchase agreements.

The Fed has $78 billion in repos maturing today.

Overnight Repos: Type of Collateral Submitted Accepted Stop Rate US Treasuries $7.25 billion None N/A Agency $27.2 billion $21.2 billion 2 per cent Mortgage-backed $28.8 billion $28.8 billion 2.06 per cent TOTAL $63.25 billion $50.0 billion

One-Day Forward Delivery 28-day Repos: Type of Collateral Submitted Accepted Stop Rate Mortgage-backed $68.20 billion $20 2.37 per cent

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First Published: Sep 17 2008 | 12:00 AM IST

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