On the heels of the central bank deliveriing its second consecutive rate cut, the size of the injection may be somewhat of a surprise. Wednesday's 25 basis point cut -- which brings the target rate to 4.5% -- follows a half percentage-point drop in September, which was intended in part to help ease stubbornly high lending rates in the interbank market.
A one-day repurchase of $12 billion, alongside a $21 billion seven-day, and a $8 billion 14-day operation was announced on the New York Federal Reserve's web site. The total exceeds the $38 billion injection back in August that marked the largest contribution to the market in a single day since the World Trade Center attacks in 2001.
"This morning's combined RP package of $41 billion is significantly larger than we had expected based on our tentative reserve projections," said Lou Crandall, chief economist with Wrightson ICAP.
It slightly undershoots the $42.5 billion in funds maturing Thursday. But the size of the operation suggests that the Fed isn't yet prepared to allow its additional liquidity to drain from a financial system still in recovery mode.
And the sheer volume of bids submitted to the repo market -- a super-safe source of funding for the top tier of the banking community -- suggests that large institutions are still wary of lending. Banks pledge collateral to the repo market in the form of government bonds and federal agency-backed bonds in return for short-term loans. Thursday morning, they submitted collateral totaling $263 billion, of which only 16% were accepted.
The effects of the summer's credit crunch are still keenly felt in the short-term debt markets, in spite of a gradual easing in interbank lending rates. At 4.60% currently, the Fed funds rate, the benchmark rate for interbank lending, continues to trades above the new target of 4.5%.
The three-month London interbank offered rate -- a key pricing benchmark for debt issuers -- was fixed at 4.8775% for the day, only a fraction below Wednesday's 4.89%.
This rate customarily trades only a few basis points above the Fed's target rate. But that gap widened to as much as 50 basis points last month, as investors insisted on bond premiums in line with what they considered to be a much riskier market environment.
Libor may still take some time to ease back in line with the new, lower target of 4.5%, said Mary-Beth Fisher, analyst at UBS Financial Services. "I'm going to be patient and say we need a few more days to let (the cut) filter through" to the interbank market, she said.