The Philippine Star

US Fed un­veils new steps to boost liq­uid­ity, man­age in­ter­est rates

- Business · Finance · Banking · United States of America · Federal Reserve System · Washington · New York · Reserve Bank of India · U.S. Treasury · New York City · New York Federal Reserve Bank · Jerome Powell · Federal Open Market Committee

WASH­ING­TON (AFP) — The Fed­eral Re­serve on Fri­day an­nounced a new pro­gram to boost liq­uid­ity in the US fi­nan­cial sys­tem and al­low the cen­tral bank to bet­ter man­age in­ter­est rates, but with­out chang­ing mone­tary pol­icy.

In the new pro­gram, the New York Fed­eral Re­serve Bank will buy about $60 bil­lion a month in short term US Trea­sury debt through the sec­ond quar­ter of next year to en­sure “the sup­ply of re­serves re­mains am­ple,” ac­cord­ing to a state­ment.

How­ever, the changes are “purely tech­ni­cal” and “do not rep­re­sent a change in the stance of mone­tary pol­icy.”

It also will con­tinue through at least Jan­uary the re­cently im­ple­mented steps to in­ject funds into the US mar­kets on a daily ba­sis.

In­ter­est rates spiked last month amid a cash crunch that had banks scram­bling to meet their daily re­quire­ments for re­serves prompt­ing the Fed to be­gin daily op­er­a­tions to swap cash for Trea­sury debt.

Fed chief Jerome Pow­ell pre­viewed the new steps on Tues­day but stressed that it was not a re­peat of the mea­sures used dur­ing the fi­nan­cial cri­sis to push down in­ter­est rates, known as “quan­ti­ta­tive eas­ing” or QE.

Pol­i­cy­mak­ers had pre­vi­ously pledged to boost bond hold­ings “at some point... to main­tain an ap­pro­pri­ate level of re­serves,” and “that time is now upon us,” Pow­ell said.

Banks bor­row reg­u­larly in mar­kets for very short pe­ri­ods, usu­ally overnight, to make sure their daily cash re­serves do not fall be­low the re­quired level. But in­ter­est rates in­crease with de­mand.

An ar­ray of fac­tors con­verged last month to dry up liq­uid­ity in the bank­ing sys­tem – in­clud­ing quar­terly cor­po­rate tax pay­ments and a surge in gov­ern­ment debt sold to in­vestors, which drained cash out of banks.

The New York Fed adds or re­moves liq­uid­ity to keep in­ter­est rates in line with the de­sired tar­get but the cash short­age last month prompted it to pump funds into the short-term repo mar­ket as rates threat­ened to break out of the tar­get range set by the Fed’s pol­icy-set­ting Fed­eral Open Mar­kets Com­mit­tee.

The New York Fed said it will con­tinue to of­fer up to $75 bil­lion a day in re­pur­chase agree­ments – ex­chang­ing se­cure as­sets for cash for very short pe­ri­ods – as well as 14-day “repo” op­er­a­tions twice a week of at least $35 bil­lion each.

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