As everyone knows, easy availability of credit at favorable rates of interest is one of the backbones of the trading ecosystem in Wall Street. Hence, if there is a slight rise or any kind of fluctuation in that rate of short term borrowing, then the entire structure enters a risky zone. Every day, trillions of dollars worth of securities are traded on Wall Street, and a large chunk of those trades are made through short term borrowing. The biggest banks and hedge funds regularly borrow to execute these trades. However, this week, this rate of interest for overnight borrowing spiked significantly and created immense turmoil in the markets.
Any slight rise in the interest rates can cause massive turmoil in the markets, and hence, it was no surprise that the New York Federal Reserve had to step in, in order to rescue the overnight lending market. This is a part of the financial market that may not get a lot of coverage but remains a hugely important part of the system. In a move that is reminiscent of the government’s decision to step in with a stimulus back in 2008, the NY FED decided to plow in an astonishing $53 billion in order to calm the overnight lending market. Analysts have stated that this is an unprecedented step in the era after the financial crisis. What is being left unsaid is the fact that all might not be well with the financial markets at this point in time.
The operation was launched by the NY FED on Tuesday, and during the process, the central bank bought up a wide range of securities to prop up the overnight lending market. The markets had been in turmoil since Monday, and the latest intervention is an indication of the way the Federal Reserve is losing control of the whole situation. The Federal Reserve is expected to cut interest rates this week in order to inject more money into the markets, and many believe that it will ease the pressure from the markets somewhat. According to an analyst at Bank of America, there are significant deficits in the banking system, and FED will eventually step in to remedy the situation. He said,
“The Fed just made a policy mistake. There is not enough cash in the banking system for the banks to meet all of their liquidity and regulatory needs. I’m not that worried, because the Fed will fix it.”