REUTERS/Kevin Lamarque
- The Federal Reserve has been boosting liquidity since mid-September when a spike in the overnight lending rate shocked the financial system.
- The central bank is using market repurchase agreements - or repos - and Treasury bill purchases to inject capital into money markets. But many find the actions are ineffective in normalizing the key rate.
- Here's why the Fed's actions may not solve lending pressures, and how they may point to additional problems to come.
- Visit the Business Insider homepage for more stories.
The Federal Reserve has been injecting capital into the financial system for weeks to calm money markets. But the actions are prompting worry among analysts, portfolio managers, and even Democratic primary candidates.
The central bank is looking to boosting liquidity after the short-term funding rate spiked to 10% from 2% overnight in mid-September. The rate dictates how expensive it is for banks to access quick capital, and the unexpected jump symbolizes volatility in the usually-stable lending market.
The spike prompted the Fed to start injecting capital through overnight market repurchase agreement operations - also known as "repos" - on September 17. The Fed also began monthly purchases of $60 billion in Treasury bills on October 15 to keep its key interest rate within an intended range.
Here's why the Fed's actions may not be enough to solve lending pressures, and how they may point to additional problems down the road.