NEW YORK -- The Federal Reserve added $17 billion of reserves to the banking system Thursday, and said it stood ready to undertake further operations as needed to keep the target rate for federal funds trading around 5.25 percent.
The infusion of cash was somewhat larger than typical for such operations, but still marked a scaling back of the U.S. central bank's liquidity additions a week earlier, when global central banks stepped in to pump hefty amounts of cash into the financial system as strains in credit markets intensified.
With global investors' aversion to riskier assets on the rise and nervousness rising about tightening conditions in credit markets, analysts are watching the Fed's open market operations closely to see to what extent the central bank is aiming to ease lending conditions via the money markets.
Since last Thursday, global central banks have pumped hundreds of billions of dollars in cash into the financial system, aiming to ease conditions in jangled credit markets.
The Fed added $12 billion of temporary reserves to the banking system via an overnight repurchase agreement. Earlier on Thursday, the Fed added $5 billion via a 14-day repurchase agreement.
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The infusions of $17 billion so far Thursday are less than half the $38 billion cash injection the Fed made last Friday, when it added the largest amount since just after the Sept. 11, 2001 attacks.
Even so, Thursday's operations were a reminder to financial markets that the U.S. central bank remains active in money markets and can inject liquidity as needed.
Some financial market participants are calling for a Fed rate cut to stave off a credit crunch. But a statement by the Fed earlier Thursday appeared to signal the central bank would keep its benchmark lending rate steady at 5.25 percent for now.
"The Desk stands ready to arrange further operations as needed to facilitate trading at rates around the operating objective of 5-1/4 percent in reserve markets," the U.S. central bank said in a statement on the New York Fed's Web site.
"A persistently low fed funds rate (where federal funds are trading in the market) is drawing suspicion that the Federal Reserve has already lowered its 5.25 (percent) fed funds target. I disagree with this assessment," wrote Tony Crescenzi, chief bond market strategist, Miller, Tabak & Co. in New York in a research note.
"It is notable, for example, that the New York Fed, which is responsible for carrying out the Fed's daily open market operations, referenced once again in a press release the 5.25 percent fed funds rate," Crescenzi wrote.
U.S. federal funds traded in the market rose to 5.25 percent late morning in New York in the aftermath of the Fed open market operations, versus around 5.00 percent early on Thursday.
A 14-day repo followed by an overnight repo are standard for the Fed to undertake on Thursdays and the operations took place at the Fed's usual operating times.
"For the new reserve maintenance period beginning today, early estimates suggest that the Desk will need to provide reserves through RP operations on most days," the New York Fed said in a statement on its Web site.
That is the usual procedure for the central bank's open market desk operations during the maintenance period.
"Each day at its normal operating time of 9:30 a.m. and on Thursdays at 8:20 a.m., the Desk will reevaluate whether it needs to arrange operations," the statement said.
The Fed said the collateral accepted on Thursday's 14-day repurchase was made up of $250 million of Treasuries and $4.75 billion of mortgage-backed securities. A total of $77.05 billion in bids were submitted.
At the $12 billion overnight repo that took place later on Thursday, the Fed said a total of $65.48 billion bids were submitted. Mortgage backed securities accounted for $11.528 billion and agency debt accounted for $472 million, the Fed said.
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