Market confidence in the Federal Reserve Bank of New York and its leader, John Williams, remains on shaky ground, after its initial response to the breakdown of a vital short-term lending market last week compounded simmering tensions.
The cost of borrowing cash overnight in exchange for US Treasuries in the repo market — crucial for banks and investors seeking to cover short-term funding needs — quadrupled to a high of 10 per cent on Tuesday, prompting the New York Fed to inject cash into the financial system to calm the turmoil.
Mr Williams and Lorie Logan, senior vice-president in the markets group, told the Financial Times that the decision to step in on Tuesday was planned and had the desired effect, with repo rates falling back down to more normal levels by the end of the week.
The main criticism from several bankers, traders and analysts, though, is that the New York Fed should have stepped in to support the market sooner, as repo rates rose on Monday. This was especially so given some stress was expected, due to corporate tax payments and Treasury settlements draining cash from the market, even if the extent of the turmoil was not.
“I think they were slow in reacting,” said Seth Carpenter, chief US economist at UBS. “They knew this could be an issue and they should have had everything lined up ready to go on Monday.”
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The people added that the New York Fed had gone some way to restoring confidence by the end of the week, following further daily cash injections. This was capped by a sweeping announcement on Friday to lend billions of dollars over the end of the quarter, when banks typically step back from the market.
“Lorie and her team came up with an analysis and strategy quickly,” said Mr Williams. “We did things quickly, decisively and it worked . . . This was a significant disruption. Markets did not see this impact coming. In a short period of time we have gone back to markets functioning well.”
Ms Logan, along with three other senior markets officials, were in Washington DC for the Federal Open Market Committee meeting. Having watched funding pressure build on Friday, she said they monitored the sharp rise in repo rates at the start of the week from a temporary office upstairs from Mr Williams’s office in the Eccles Building, where the board of governors meets.
