Fed pumps more cash as key rate breaks above target

NEW YORK (Reuters): The Federal Reserve injected another $ 75 billion into the US banking system on Wednesday, restoring a measure of order after a bout of extreme volatility inside the bank funding market drove the central bank’s benchmark interest rate above its targeted range for the first time since the financial crisis.

The ructions in the money market come as Fed policymakers met and cut interest rates again on Wednesday to combat risks from US-China trade tensions, a slowing global economy and sluggish domestic inflation.

This puts pressure on Fed officials to come up with long-term fixes – such as a standing repo facility and cutting interest on what they pay on excess reserves (IOER) and growing its balance sheet – to avert further volatility in funding markets and to add more permanent reserves into the banking system, analysts said.

On Wednesday, the Fed lowered the interest it pays on IOER by 30 basis points, to 1.80%.

On Tuesday, the “effective” or average interest rate in the federal funds market, which the Fed aims to influence, hit 2.30%, above the top-end of the Fed’s current range of 2.25%.

Such a move, which has not happened since 2008, if it persists would rattle investor confidence in the Fed.