'What stable financial system requires over $100 billion in overnight liquidity injections?' -- NorthmanTrader
Actually, accelerated intervention mode. Not just a “mid-cycle adjustment,” as Fed Chairman Jerome Powell said in July, but interventions to the tune of tens of billions of dollars every day.
But market demand for overnight repo operations has far exceeded even the $75 billion the Fed has allocated, suggesting a lot more liquidity demand. Hence, on Wednesday the Fed suddenly announced a $45 billion increase on top of the $75 billion repo facility for a daily total of $120 billion. Here’s the Federal Reserve Bank of New York, the branch involved in such actions:
To be clear: This is not a temporary rise in the balance sheet; this is the beginning of something big. The Fed’s balance sheet looks like it will expand to record highs once again. It may well be that our financial markets have permanently devolved into a Fed-subsidized, wealth-inequality-generating machine benefitting the few that own stocks. But one has to wonder why the rate cutting and liquidity injections haven’t been able to produce sustained market highs.First came the hints in January. “Flexible on the balance sheet,” Powell suddenly was uttering following the fourth-quarter 2018 stock market massacre, producing a 3.5% rally in one day on that pronouncement.
Investors have been chasing the Fed into corporate multiple expansion all year. But now that the Fed is forced to intervene ever more aggressively, it has to prove something: Efficacy.
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