Inertia in excess reserves

New York Fed says its looking into banks' role in funding-market issues

New York Fed President John Williams said the central bank was looking into why banks with excess cash didn't step into funding-markets when overnight borrowing costs shot up earlier this week, in an interview with the Financial Times published Friday. "The thing we need to be focused on today is not so much the level of reserves [held at the Fed]," he said. "It's how does the market function." Market participants said a scarcity of cash and reserves at banks may have been responsible for leading to the jump in the overnight repurchasing rate, the amount banks and hedge funds pay to borrow cash for a single day. The Fed is focusing on how banks may have contributed to the problems in funding markets.