CNN Business - A crack just emerged in the financial markets: The NY Fed spends $53 billion to rescue the overnight lending market

Article by Matt Egan in CNN Business

Borrowing rates skyrocketed on Tuesday in a corner of the markets the public rarely notices but that is critical to the functioning of the global financial system.

The spike in overnight borrowing rates forced the New York Federal Reserve to come to the rescue with a special operation aimed at easing stress in financial markets.

It was the NY Fed's first such rescue operation in a decade, the last occurring in late 2008."It's unprecedented, at least in the post-crisis era," said Mark Cabana, rates strategist at Bank of America Merrill Lynch.

On Tuesday morning, the NY Fed launched what's called an "overnight repo operation," during which the central bank attempts to ease pressure in markets by purchasing Treasuries and other securities. The goal is to pump money into the system to keep borrowing costs from creeping above the Fed's target range.

The episode demonstrates evidence of emerging strains in financial markets and raises concern that the Federal Reserve could be losing its grip on short-term rates. "The funding markets are clearly stressed," said Guy LeBas, managing director of fixed income strategy at Janney Capital Markets. "It's going to require Fed action."

The NY Fed announced plans late Tuesday to hold another repurchase agreement operation on Wednesday that would aim to repurchase up to an additional $75 billion.

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