“This is what the New York Fed is supposed to do — making sure markets are running smoothly. Today was not smooth...'
Some Wall Street analysts have been warning for weeks about the possibility of a shortage of liquidity in U.S. short-term money markets and were unnerved by the slow response of the New York Federal Reserve after rates in an important area of short-term funding spiked over a 48-hour period, forcing the central bank’s intervention.
“They were a day late, they should’ve been in the market once things got a bit crazy in the afternoon [on Monday],” said Marvin Loh, senior global markets strategist at State Street. However, a number of traders, strategist and bankers said the Fed should have known that a fears about a dearth of a liquidity were building up in the system and could have avoided the spike in short-term rates. Repo rates climbed as high as 6% at the end of last year.
Some questioned whether the Fed lost control of that vital area of funding in the market by allowing funding rates to surge, with some participants saying that the need for an emergency action raised questions about the regulator’s response in the face of a genuine crisis. Add all that with the deluge of U.S. corporate debt issued in September and you get “a bite on liquidity,” Pacific said.For one, the U.S. Treasury Department has been rebuilding its cash reserves, after running them down to keep the government open, before Congress finally raised the federal debt ceiling in July. To do that the Treasury has been issuing a deluge of short term debt and parking the funds in its Treasury General Account at the Fed.
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