NEW YORK -- The U.S. Federal Reserve added $7 billion of temporary reserves to the banking system Wednesday, after refraining from open market operations on Tuesday for the first time in three months.
That pales by comparison with the $38 billion cash infusion the Fed made Friday, when it injected the largest amount since just after the September 2001 attacks. Even so, Wednesday's operation was a reminder to financial markets that the U.S. central bank remains active in money markets and can inject liquidity as needed.
The size of Wednesday's operation was broadly in line with amounts added in weeks that follow Treasury auctions as they settle, analysts said.
Last week, the Treasury Department auctioned $13 billion of 10-year Treasury notes and $9 billion of 30-year bonds. As these operations settle, they tend to put upward pressure on federal funds rates in the market, analysts say. The Fed's temporary infusions of liquidity can help to bring the rate down to or below the 5.25 percent target the Fed sets.
The Fed added the $7 billion of temporary reserves to the system via overnight repurchase agreements and said the collateral accepted on the overnight repurchase was made up of $2.5 billion of agency debt and $4.5 billion of mortgage-backed securities. A total of $47.575 billion in bids were submitted for the overnight repurchase, showing heavy demand.
Story Continues Below
After the amount of the overnight repo was announced, federal funds, or bank reserves that changed hands in the overnight market, traded in the market at 4.75 percent, below the 5.25 percent target and down from the 5.00 percent level earlier on Wednesday.
Early in the session, in a departure from its standard approach, the Fed signaled in advance that preliminary estimates suggested it would undertake an overnight repo at its usual operating time.
"An overnight RP, which would be conducted at the Desk's normal operating time of 9:30 a.m., will be needed to accommodate heightened reserve needs typical on a Treasury mid-quarter refunding date," the Fed said in a statement on the New York Fed Web site.
But that first auction was cancelled and replaced by another later in the morning. The Fed said it conducted the operation manually after a technical problem led to the cancellation of the initial overnight repurchase agreement.
"Due to a technical problem with our auction system we had to cancel our initial operation. We have reannounced our auction and are conducting it manually," a New York Federal Reserve spokesman said.
"In addition, the Desk stands ready to conduct further operations later in the day if needed," the Web site statement added.
On Tuesday, the Fed refrained from undertaking an open market operation. It was the first working day since May the U.S. central bank had not conducted one. Since late last week, the Fed has injected a substantial amount of cash into the market to increase liquidity.
This week, global central banks have scaled back hefty cash infusions aimed to calm jittery credit markets. On Wednesday, the European Central Bank, for the first time since last Thursday, gave no extra short-term money to keep the financial system operating smoothly. Central banks in Japan and Switzerland actively drained cash from local markets.
On Friday, the Fed added $38 billion of liquidity. It was the biggest temporary addition to the banking system the bank had made in a single day since Sept. 19, 2001, in the aftermath of the Sept. 11 attacks.
On Thursday, the Fed pumped $24 billion into the U.S. banking system — its biggest single-day cash injection in nearly four months. But that was dwarfed by the ECB's action earlier in the day, when it provided a record 94.8 billion euros ($130 billion) in extra liquidity.
© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
Editor's note:
Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.
The 3 Best Income Stocks in the World
Buffett Says This Book Made Him Billions
