U.S. money markets showed some signs of calm as the Federal Reserve injected another $75 billion of liquidity and key rates pulled back from troubling levels.
Although the U.S. money-market interest rate remained elevated for a third straight day — after spiking to a record 10% Tuesday — it came back down to 2.8% early Wednesday even before the Fed accepted billions of dollars worth of Treasuries and other securities.
Now attention turns to this afternoon’s Federal Open Market Committee decision to see what, if any, further action policy makers take to calm the overnight lending business and ensure higher rates don’t harm other parts of the economy.
They’ll likely have to do something because the New York Fed said Wednesday that the effective fed funds rate busted through policy makers’ 2.25% cap the day before, coming in at 2.3%. That’s bad because it shows the Fed losing its grip on short-term interest rates, undermining its ability to guide the financial system.
“These money markets are a very powerful part of the financial system and everything flows through,” said John Herrmann at MUFG Securities in New York. “What the Fed has been doing so far to address the issues is like being a fire department chasing the fire instead of sort of installing fire hydrants through facility. They need to do more.”
The Fed dose of cash Wednesday follows a $53.2 billion liquidity injection Tuesday, the first in a decade and an attempt to restore order within the underpinnings of U.S. markets.
