NY Fed Props Up Overnight Lending For First Time Since 2008

For the first time since 2008, the New York Federal Reserve was forced to inject capital into the U.S. financial system to stave off a spike in overnight lending rates Tuesday.

What Happened

The New York Fed injected $53 billion in capital into the U.S. financial system Tuesday by buying U.S. Treasuries and other securities. The so-called “overnight repo operation” came in response to interest rates on overnight repurchase agreements spiking as high as 5% on Monday, more than double the Federal Reserve’s target range of between 2% and 2.25%.

Why It’s Important

The overnight lending market is important to the stability of global financial markets because it ensures liquidity in lending markets. When overnight lending rates spike, banks are unwilling to borrow from each other and could freeze their lending as well. A breakdown in the overnight lending market contributed to the 2008 financial crisis.

The Fed injected $53 billion Tuesday and said it plans to inject another $75 billion Wednesday to ensure that the market remains capitalized.

The most troubling aspect of the capital injection for investors is that it’s not immediately clear exactly why rates are spiking this week.

It’s never good news to hear that the Fed is helping prop up the lending market, but Bank of America Merrill Lynch analyst Hans Mikkelsen said Tuesday that investors shouldn’t be fearful at this point.

“In an [open market operation], the Fed lends against assets, thus adding reserves to the system. This is standard use of a standard old tool in the Fed’s tool box,” the analyst said in a note. 

Benzinga’s Take

In a vacuum, the OMO is nothing for investors to get worked up about ahead of another potential interest rate cut from the Fed on Wednesday.

Investors will be watching closely for any signs of what is causing the liquidity issues in the overnight lending market and whether or not additional Fed injections will be needed.

So far this week, the SPDR S&P 500 ETF Trust SPY is down 0.4% ahead of the Fed rate decision.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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