US Fed takes a pill to sooth its ‘shrinking pains’

Aegon Asset Management
By November 7, 2019 08:42

US Fed takes a pill to sooth its ‘shrinking pains’

House View October 2019

A prominent topic in the last month (aside from the ECB’s aggressive new monetary stimulus) was the sudden cash crunch in the repo market, i.e., the market for very short-term, typically overnight, lending.

On Monday, September 16, overnight borrowing rates started to rise, spiking to as high as 10% the following day. The Fed calmed the market by announcing a two-week operation to meet the demand for cash. In the meantime, the Fed has gone even further: it will begin to buy around $60 billion of Treasury bills per month for six months. The Fed is calling this latest intervention the ‘organic growth’ of its balance sheet, keen to avoid the slightest impression that this is a new form of QE. We are pretty relaxed about these developments. In our view, the recent tightness in the repo market was a purely technical issue. It has been caused mainly by the unwinding of the Fed’s balance sheet, which had ballooned in the wake of the financial crisis. The Fed’s intervention in the repo market can be compared to taking an aspirin against its ‘shrinking pains’. It is not a sign of a new financing crisis.

Aegon Asset Management
By November 7, 2019 08:42



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