The Federal Reserve sought to ease concern yesterday that banks would be short of cash next month by announcing its first long-term injection of year-end cash into the money markets in two years.
The Fed's New York branch said in a statement that it planned a series of repurchase agreements, or repos, starting with an $8 billion injection tomorrow, extending into next year. The move follows the European Central Bank's commitment last week to make extra cash available to "counter the re-emerging risk of volatility" in money markets.
"The Fed is pulling out all stops to try to alleviate funding pressures in the money and financing markets as the markets lurch into year-end," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Fed officials acted after the average U.S. overnight-lending rate between banks exceeded their target seven of the last eight days, suggesting a reluctance to lend amid mounting subprime-mortgage losses.
In most years, banks face year-end pressures as they adjust their books to show ample liquidity - available cash - and at the same time meet a jump in demand for cash from consumers.
The New York Fed said it planned the steps "in response to heightened pressures in money markets for funding through the year-end."
Officials will "provide sufficient reserves to resist upward pressures" on the benchmark federal funds rate around year-end. Tomorrow's repo will mature Jan. 10.
With a repo, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from its 21 primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers and the cash to the Fed.