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UPDATE 2-Fed adds longer-term cash to U.S. banking system

Richard Leong

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NEW YORK, Sept 24 (Reuters) - The Federal Reserve on Tuesday injected longer-term cash into the U.S. banking system in an effort to meet the funding needs of banks and Wall Street following a bout of turbulence in money markets last week.

The New York Federal Reserve added $30.0 billion cash into the banking system through 14-day loans to primary dealers. These 14-day term repurchase agreements (repo) were on top of the $75 billion in temporary cash through an overnight repo operation.

Primary dealers, or the top 24 Wall Street firms that do business directly with Fed, borrow from the central bank by using their Treasuries and other bonds as collateral.

Their demand for funding was strong with $62 billion in bids submitted for the 14-day operation and $80.2 billion at the overnight operation, data from the N.Y. Fed showed.

A week ago, the Fed started to add large-scale liquidity into the financial system for the first time since the height of the global credit crisis, which a decade ago nearly froze the repo market - a major source of cash for banks and Wall Street.

Last Tuesday, overnight borrowing cost in the $2.2 trillion repo market spiked as high as 10%, which was five times more than what the central bank is targeting now.

Analysts generally blamed a shortage of bank reserves as the culprit for the market turbulence, together with huge seasonal payments for taxes and Treasury supply.

"Clearly the market has stabilized quite a bit," said Jonathan Cohn, interest rate strategist at Credit Suisse in New York. "The Fed's quick response to provide liquidity has helped the situation."

Still analysts said demand for funding will likely remain elevated going into quarter-end when repo lending tends to decline as banks want to conserve cash on their balance sheets to meet reporting requirements.

On the open market, overnight repo rates slipped to 1.95%-2.05% after the addition of cash from the central bank, down from 2.01%-2.10% shortly before the Fed operations.

Primary dealers were able to obtain overnight funding at below-market cost.

The stop-out rate on overnight repos backed by Treasuries at Tuesday's Fed operation was 1.80%, while those on one-day repos backed by agency debt and mortgage-backed securities was 1.83%.

The N.Y. Fed will conduct overnight repo operations, worth at least $75 billion, daily through Oct. 10.

It will hold two more 14-day term operations, worth at least $30 billion, on Thursday and Friday.

(Reporting by Richard Leong Editing by Andrew Heavens and Nick Zieminski)