As part of a concerted global effort to combat panic in the money markets, the New York Federal Reserve injected a record $105 billion in funds into the system Thursday.
The Fed's add far outpaced the $81.25 billion added on Sept. 14, 2001, the previous daily record. It comes as global central banks overnight sought to meet a massive demand for dollars around the world after money markets seized up.
Interbank lending has all but dried up in the wake of the Lehman Brothers bankruptcy, the bailout of insurance giant American International Group and Merrill Lynch's sale to Bank of America. The financial sector's woes continued to escalate even after the AIG bailout, with thrift Washington Mutual and investment bank Morgan Stanley under pressure.
Three-month borrowing rates spiked higher even as central banks, including the European Central Bank and the Bank of England, added dollar liquidity. Dollar benchmark borrowing rates — the London interbank offered rate — for three months leapt Thursday to 3.203% from 3.062%.
The Fed added $50 billion each in two rounds of overnight open-market operations, an early-morning and a late-morning one, which were held besides its regular 9:30 a.m. operations. At that scheduled intervention, it added $5 billion in 14-day repos.
In contrast, on Sept. 14, 2001, the Fed injected a total of $81.25 billion, according to the New York Fed. The largest single operation was carried out on Sept. 17, 2001, and amounted to $57.25 billion, the Fed said.
Fed funds were recently quoted at 2.5%, according to Tullett, remaining above the 2.0% target despite the massive liquidity injections. Monday, the funds rate had spiked up to 6% before the Fed added $50 billion in liquidity.
Amid widespread fears over the health of the financial system, investors are piling into the safest and shortest-dated securities: Treasury bills. In particular, concerns are rife over possible outflows in the $3.6 trillion money-market industry — a key provider of liquidity to short-term funding markets.
Rampant demand has driven the annualized yields on bills sharply lower even as the Treasury has stepped up its sales of short-term cash-management bills to raise funding for the Fed.
Treasury has sold $70 billion in cash-management bills since it announced its special program Wednesday and is scheduled to sell another $30 billion later Thursday.
Overnight, the European Central Bank, the Bank of England and the Swiss National Bank added dollar liquidity to their domestic markets, making use of a currency swap with the Federal Reserve that was significantly expanded.
Demand was rampant. The ECB sold $40 billion in funds but got bids of nearly $102 billion.
The Fed also authorized new swap facilities with the Bank of Japan and the Bank of Canada.
In total, the Fed's swap facilities have risen to $247 billion from $67 billion.