the Fed is acting to avoid a liquidity crisis

Victoria Adam,

The Fed was brought this week to inject billions of dollars into the money markets, where the onset of liquidity crisis drove up short rates earlier this week. She will continue these "technical" injections until October 10th

(Boursier.com) – What's happening in the US short-term debt market? Earlier this week, very short-term rates ("repo") soared to nearly 10%, forcing the Federal Reserve to intervene for the first time since the great financial crisis of 2008 to ensure liquidity and calm rates …

Evoking purely "technical" factors, the New York Fed has injected Tuesday $ 53 billion into the market "repo", then an additional $ 75 billion each of the next three days, for a total of $ 278 billion (about 252 MDSE).

To reassure the markets, the Fed also lowered Wednesday the rate of remuneration of banks' excess reserves, which went from 3.2% to 2.9%. On the same day, it lowered its fed funds rate by a quarter point to 1.75% -2%.

Strong demand for liquidity

The repurchase market is a secure method of financing that allows banks to obtain liquidity through a system of very short-term loans between institutions. Banks lend themselves to cash, usually over 24 hours, trading for very safe securities, US government bonds (Treasuries). But in recent days, faced with strong demand, liquidity has run out, driving up interest rates …

The monetary authorities ensure that this situation does not reflect a mistrust between banks (which triggered the subprime credit crisis in 2008). They believe that this soaring "repo" rate is linked to technical and seasonal factors that have greatly increased banks' demand for liquidity.

The Fed will continue to intervene until October 10

These include major demands from US companies to pay their September tax installments. Moreover, the sharp rise in the volume of government bonds (Treasuries) by the federal government, under the Trump administration, has inflated the balance sheet of banks. They are then encouraged to exchange these bonds for liquidity on the "repo" market, causing an imbalance between the supply and demand for government bonds. The fact that the Fed has reduced its balance sheet for two years, ceasing to buy back maturing government bonds, has accentuated the phenomenon.

Friday night, the rates of "repo" had returned to their normal level, around 2.05%, against 10% in the day of Tuesday. However, faced with the fear of a new resurgence, the New York Fed announced Friday that it would continue to inject up to $ 75 billion a day on the interbank market until October 10, to ensure that there is sufficient liquidity in this market for short-term loans between banks.

© 2019, Boursier.com