US Fed's Powell downplays concerns about cash crunch on financial markets

Federal Reserve Chairman Jerome Powell addresses reporters on Wednesday September 18, 2019 (AFP Photo/Olivier Douliery)

Washington (AFP) - US Federal Reserve Chairman Jerome Powell downplayed concerns in recent days about a cash crunch in US financial markets, saying the situation says little about the real economy.

Powell said the need to pay quarterly tax payments was a factor, which prompted the New York Federal Reserve Bank twice this week to inject liquidity into the short-term funding market.

"While these issues are important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy," Powell said in a news conference.

Banks borrow regularly in markets to make sure their daily cash reserves do not fall below the required level. And the Fed adds or removes liquidity to keep interest rates in line with the desired target.

But a cash shortage in recent days prompted the New York Fed on Tuesday and Wednesday to pump $128 billion into the short-term market as interest rates soared and threatened to break out of the Fed's target range.

Economists pointed to the technical factors that were behind the issue but said it was concerning that the US economy's financial plumbing seem to have a clog.

Powell noted that the deadline for tax payments coincided with a surge in Treasury debt issues, which drained cash from the financial system temporarily.

"Our sense is that it surprised market participants a lot too," Powell said. "People were writing about this and publishing stories weeks ago. It was a stronger response than we expected."

But he said the New York Fed operations "were effective in relieving funding pressures."

To help alleviate the issue, the Fed cut the interest rate it pays to banks on cash reserves above the required level by 30 basis points to 1.8 percent, in a bid to push more cash into markets.

In addition, the central bank lowered the rate it uses on daily overnight lending to 1.7 percent -- below the bottom of the target range for the main policy rate of 1.75 to 2.0 percent.

Powell said the institution is committed to providing sufficient reserves to the financial system.

"We'll continue to monitor market developments and conduct operations as necessary" to keep the benchmark interest rate in line.