The Fed seems to have halted a potential crisis in the overnight lending market — for now

The Fed seems to have halted a potential crisis in the overnight lending market — for nowhe 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.

Issues in the overnight lending market, where banks go 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’ve managed to inject enough liquidity to provide a strong signal that they’re 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 has conducted daily operations thus far totaling more than $234 billion to dampen market volatility and keep the central bank’s overnight funds level, which is used as a benchmark for multiple other short-term interest rates, within a range of 1.5%-1.75%.

On Monday alone, the Fed injected another $18.65 billion for a two-day repo operation — exchanging high-quality capital for cash — and $30.8 billion in a one-day offering.

David Adams

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