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Threat to US Lending Markets: The Fed Will Act Soon

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To address the shocks to overnight markets that took place last month due to the lack of liquidity, the Fed will start short-term purchase operations “soon,” according to Jerome Powell the Fed Chair. Remember that several weeks ago overnight lending markets were overwhelmed by companies making tax payments while the Treasury Department settled bond auctions – the overnight rates to borrow spiked to 5% to 10% – both surprising the Fed and global markets. The Fed acted by adding liquidity by way of a temporary system but with Brexit and the US-China Trade War now threatening global markets, a permanent system is necessary. This new system will prevent market shocks and excess volatility as some economists are predicting a recession. This volatility can impede the effective implementation of monetary policy and the “reserves” must be sufficient to absorb shocks. One interesting point is that the Fed must expect market weakness in the future as these measures are somewhat pre-emptive.

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