In a move not seen since the 2008 financial crisis, the Federal Reserve has pumped billions into financial markets for two days in a row.
Borrowing rates skyrocketed on Tuesday in a corner of the markets the public rarely notices but that is critical to the functioning of the global financial system.
The spike in overnight borrowing rates forced the New York Federal Reserve to come to the rescue with a special operation aimed at easing stress in financial markets.
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On Tuesday morning, the NY Fed launched what's called an
"overnight repo operation," during which the central bank attempts to ease pressure in markets by purchasing Treasuries and other securities. The goal is to pump money into the system to keep borrowing costs from creeping above the Fed's target range.
Cabana, the Bank of America strategist, pointed the finger at the fact that on Monday, US companies withdrew large chunks of money from banks to make quarterly tax payments to the US Treasury Department. That forced banks to drain their reserve(s) parked at the Fed. Bank of America estimates $100 billion of reserves was drained from the banking system on Monday.
Bigger picture, some analysts believe the rate spike is a symptom of the surge in Treasury bonds being issued to fund the $1 trillion federal deficit. Government borrowing has climbed because of a decline in tax revenue from the Republican tax law and a bipartisan surge in federal spending.
So here we are, supposedly not in a financial crisis, and yet the Fed is already acting on these pressures in the market. We’ll see how this all plays out in the coming days and months, but this is not a good sign for the U.S. economy under Donald Trump.
Hold on, folks—we may be in for a bumpy ride.