Fed halts potential crisis in lending market
THE Federal Reserve is closing out 2019 seemingly in control, at least for the moment, of a problem that only a few months ago threatened to spiral into a crisis, www.cnbc. com reported.
Issues in the overnight lending market, where banks went to fund their operations, caused short-term borrowing rates to spike briefly in mid-september. More importantly, they raised concerns over whether the Fed’s attempts to stage manage its escape from the extraordinary measures it took during and after the financial crisis were running awry.
Despite concerns that those earlier issues would crop up again as the year came to a close and a liquidity crunch would erupt again, the funding market, known as repo, seems to be running smoothly.
“They have managed to inject enough liquidity to provide a strong signal that they are going to be flexible and provide further assistance to see themselves through what was going to be a very tight period,” said James Mccann, global economist at Aberdeen Standard Investments.
“It looks like they’re going to catch up with a problem that had quite embarrassingly gotten out of control.”
Credit Suisse analyst Zoltan Pozsar notably predicted that unless the Fed before year’s end initiated a fourth round of bond buying — quantitative easing — it could face a severe funding crisis. Market concerns focused on a cash crunch stemming from Treasury settlements, as well as big banks concerned about meeting end-of-year capital requirements being reluctant to provide funding to institutions that need it.
To address the issues, the Fed had conducted daily operations thus far totaling more than $234bn to dampen market volatility and keep the central bank’s overnight funds level, which is used as a benchmark for multiple other shortterm interest rates, within a range of 1.5 per cent - 1.75 per cent.
On Monday alone, the Fed injected another $18.65bn for a two-day repo operation — exchanging high-quality capital for cash — and $30.8bn in a one-day offering. However, both issues were undersubscribed, having offered $75bn and $35bn, respectively.