Overnight lending market drama continues, forcing the Fed to pump in more and more cash


The Federal Reserve of New York has promised to ease the turmoil that broke out last month in the one-day loan market. Certainly, fulfilling that promise is proving to be very heavy work.

It has been indicated that loan costs have returned to normal. Even so, it is said that this is only because the Federal Reserve of New York is injecting large amounts of money to alleviate the cash crisis before it spreads to the real economy or affects the confidence of consumers and businesses.

Undoubtedly, the aggressive steps of the Federal Reserve, together with the strong demand of the banks, show that the one-day loan market has not returned to normal.

Banks are still a drama for cash and the Fed is quick to fill the void.

It is clear that there is a shortage of cash that is still under debate and is blamed for everything from post-crisis regulations to the $ 1 billion deficit. Likewise, the Federal Reserve is still trying to calculate how much cash is needed to relieve stress.

It is necessary to indicate that earlier this week, the Federal Reserve of New York announced that it increased the size of its repurchase agreement (repo) operations overnight to at least $ 120 billion. That is more than $ 75 billion previously. And the New York Federal Reserve raised the size of its term operations, which span several days, to at least $ 45 billion.

In this way, all that adds up to the $ 60 billion in treasury bills that the Fed has promised to buy directly each month. Thus, this permanent liquidity will increase the size of the central bank’s massive balance sheet, reversing recent efforts to reduce it.

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Source: Matt Egan | CNN Business

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