Fed halts po­ten­tial cri­sis in lend­ing mar­ket

The Punch - - PERSONAL BANKING -

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.

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