MercoPress. South Atlantic News Agency

Fed announces supply of reserves plan to avoid “cash crunches”

Fed chief Jerome Powell stressed that it was not a repeat of measures used during the financial crisis to push down interest rates, known as “quantitative easing”

The Federal Reserve has announced a new program to boost liquidity in the US financial plumbing 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 US$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 US$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 US$35 billion each.