NEW YORK: The US Federal Reserve on Tuesday injected billions into the financial system in an effort to calm money markets that have been roiled since Monday, as lending dwindled partly due to huge payments for taxes and bond supply.

The chaos in money markets added to Fed policymakers’ list of concerns that is already heavy on risks from US-China trade tensions, a weakening global economy and sluggish domestic inflation.

Fed officials began a two-day policy meeting on Tuesday. Traders are expecting the US central bank on Wednesday will cut its policy rate by a quarter of a percentage point.

The surge in borrowing costs, which banks and Wall Street pay to raise cash to fund their trades and loans, also exposed cracks in money markets left by the Fed’s normalisation of its massive balance sheet, analysts said.

The central bank’s reduction of its holdings of Treasuries and mortgage-backed securities - which it amassed during three rounds of quantitative easing - was at least partly responsible for a nearly $900bn decline in bank reserves since 2017.

“The root cause is the shortage of reserves,” said Gennadiy Goldberg, senior interest rates strategist at TD Securities in New York. “This is a funding squeeze.”

At one point on Tuesday, overnight borrowing costs in the $2.2tr repurchase agreement market spiked to as high as 10pc.

In the repo market, banks and Wall Street dealers use securities as collateral to obtain cash from money market funds and other cash investors.

Published in Dawn, September 18th, 2019