Up and down Wall Street, phones lit up Tuesday morning as a crucial market for billions in overnight borrowing suddenly started to dry up. What had begun on Friday, with tremors inside U.S. short-term funding markets, was escalating rapidly.Not since the 2008 financial crisis has a spike in money-market rates caused such a stir — or prompted such a response
Inside the Federal Reserve Bank of New York, the powerful markets group had already been canvassing dealers about lending rates. By 10:10 a.m., after an initial, embarrassing misstep, the Fed was pumping US$53.2 billion into the market to calm nerves and regain control over interest rates — its first intervention since the dark days of Bear Stearns, Lehman Brothers and the rest.
Unlike in 2008, Tuesday’s abrupt rise in short-term rates wasn’t evidence that the financial system was in trouble. Rather, it was the result of a confluence of forces, including corporate tax payments and big Treasury auctions and, ultimately, the swelling U.S. budget deficit. The market was so topsy-turvy that the effective fed funds rate rose, even as economists predict the central bank will reduce the benchmark at its policy-making meeting on Wednesday.
The repo rate kept rising, eventually reaching as high as 10 per cent. By 9 a.m., a half hour before the stock market was to open, the fed funds rate was bumping up against the Fed’s upper limit.