Banks have struggled in recent days to find the cash needed to meet reserve requirements which has pushed up short-term borrowing rates. US Federal Reserve Chairman Jerome Powell on Wednesday downplayed concerns about the cash crunch in US financial markets, saying the situation says little about the real economy.
Like many economists, he attributed the issue to the deadline for quarterly business tax payments, which prompted companies to withdraw cash from bank accounts, converging with a surge in Treasury debt issues, which moves cash out of the economy and into the government's coffers.
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. 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 to pump just more than $200 billion into the short-term market as interest rates soared and threatened to break out of the Fed's target range.