Free exchange – Despite the Fed’s efforts, the repo market risks more turbulence | Finance and economics

Free exchange – Despite the Fed’s efforts, the repo market risks more turbulence | Finance and economics

Dec 21st 2019FROM ONE perspective, the Federal Reserve is expecting a quiet 2020. Of the 17 rate-setters at America’s central bank, 13 expect that i

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FROM ONE perspective, the Federal Reserve is expecting a quiet 2020. Of the 17 rate-setters at America’s central bank, 13 expect that it will not change interest rates at all during the coming year. But monetary-policy inaction does not mean that central bankers will enjoy a relaxing festive season. In another area for which they are responsible, there is trouble looming. The so-called repo market, through which financial firms lend each other more than $1trn every day, could cause the Fed a headache on December 31st—and a hangover in the new year.

During 2019, as the Fed partially unwound the quantitative-easing (QE) programme under which it had bought Treasury bonds to stimulate the economy, the supply of cash reserves to the banking system dropped (see chart). Meanwhile, a large fiscal deficit—the result of America’s tax cuts and spending increases in recent years—prompted more Treasury issuance. Because buying Treasuries means handing over money to the…



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