Fed takes action to control short-term interest rates

The Fed's operation, which ended up being for US$53b, was aimed at keeping the Fed's policy rate from trading outside of its range. Photo / 123RF

The Federal Reserve Bank of New York carried out US$53 billion ($83.6b) in transactions known as repurchase agreements Tuesday as a way to relieve upward pressure on interest rates in overnight money markets.

Economists do not see the action as a signal about where the Fed plans to move its key policy rate, known as the federal funds rate, but rather as a technical exercise to keep the rate in the range set by the central bank.

The Fed is expected to cut this benchmark rate for a second time this year at its meeting this week.

The target for the funds rate, which is the interest rate banks pay each other for overnight loans, currently stands in a range of 2 per cent to 2.25 per cent after a quarter-point cut in July.

On Monday, the funds rate was trading at 2.25 per cent, at the top of its current range. In an effort to move it back into the current range of 2 per cent to 2.25 per cent, the New York Fed announced Monday it planned to conduct a repurchase operation for up to US$75b on Tuesday morning.

The Fed's operation, which ended up being for US$53b, was aimed at keeping the Fed's policy rate from trading outside of its range.

Analysts were not certain what had caused higher demands for repurchase agreements to push the trading range higher but said it did not seem to be signaling any fundamental problem with credit markets and could have been tied to an adverse reaction to a jump in oil prices after Saudi Arabia's production facilities were attacked over the weekend.

"This is a technical exercise and has no implications for Fed policy at all," said economist David Jones, the author of four books on the Federal Reserve.

- AP