NY Fed To Extend Operations To Pump Money Into Markets Through Nov 4

The New York Federal Reserve Bank said Friday it will continue to inject billions into the US financial plumbing on a daily basis through November 4, extending the operations by three weeks.

The effort, begun in mid-September, is aimed at preventing a spike in short-term interest rates, the New York Fed said in a statement.

Rates spiked last month as banks struggled to find the cash needed to meet reserve requirements, prompting the Fed to pump billions into US money markets.

It announced daily operations which were due to end October 10, but even then demand exceeded supply on some days.

In Friday's announcement, the New York Fed said it will continue to offer up to $75 billion a day in repurchase agreements -- exchanging secure assets for cash for very short periods -- as well as 14-day "repo" operations twice a week of at least $35 billion each.

Economists say an array of conditions converged to dry up liquidity in the banking system -- including quarterly corporate tax payments and a surge in government debt sold to investors, which drained cash out of banks.

Banks borrow regularly in markets for very short periods, usually overnight, to make sure their daily cash reserves do not fall below the required level. But interest rates increase with demand.

The New York Fed adds or removes liquidity to keep interest rates in line with the desired target, but the cash shortage last month prompted it to pump funds into the short-term repo market as rates threatened to break out of the target range set by the Fed's policy-setting Federal Open Market Committee.

The central bank cut benchmark lending rates last month and many expect another rate cut on October 31 at the next FOMC meeting.

"The operation schedule and parameters are subject to change if market conditions warrant or should the FOMC alter its guidance to the desk," the New York Fed said Friday.