The federal reserve was forced to inject liquidity into financial markets yesterday (and today) for the first time since 2007. The Great Recession began as a liquidity crisis. Bank failures are precipitated by poor liquidity.
The financial markets depend on cheap short-term financing to operate. Without it, markets dry up. This is why the fed had to intervene.
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.
**The funding markets are clearly stressed."**It was the NY Fed's first such rescue operation in a decade, the last occurring in late 2008."It's unprecedented, at least in the post-crisis era," said Mark Cabana, rates strategist at Bank of America Merrill Lynch.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 first attempt by the NY Fed was canceled because of "technical difficulties." Minutes later, the NY Fed successfully injected $53 billion into the system.The episode demonstrates evidence of emerging strains in financial markets and raises concern that the Federal Reserve could be losing its grip on short-term rates."The funding markets are clearly stressed," said Guy LeBas, managing director of fixed income strategy at Janney Capital Markets. "It's going to require Fed action."
The NY Fed announced plans late Tuesday to hold another repurchase agreement operation on Wednesday that would aim to repurchase up to an additional $75 billion.