The liquidity tensions in the markets are troubling in the US economy


Looking at the progress of Wall Street, things seem to be going well. The indices are at their maximum despite global uncertainty, credit flows normally pass through the real economy, companies take a sustained pace and banks have large capital buffers. But there is a dark and remote corner of the financial system, to which only large companies, banks and asset management funds have access, where tension dominates and is forcing the Federal Reserve to mobilize to contain the situation.

It all started in mid-September, when the types of short-term loans skyrocketed. The Fed proceeded with a surprise reactivation of a program that allows it to make daily purchases of ultra-secure debt in exchange for cash, in order to inject liquidity into the system and, in the process, control the price of money. This tool is known as "repo" and the last time it was used was eleven years ago, during the financial crisis. The idea was to keep these operations on the market for a few days.

The repurchase agreement consists of the general terms of a repurchase transaction whereby a financial institution or an institution sells an asset to an investor pursuant to the agreement to repurchase it on a given date at a given rate. It is usually done with public debt securities. This mechanism allows the Fed to act almost immediately to respond to timely liquidity needs and maintain the flow of credit.

Purchases are made by the Federal Reserve of New York, the bank that carries out monetary policy in the United States. The exchange takes place through daily auctions of 75,000 million dollars. Demand has far exceeded the offer, so it was decided to extend it a little more over time. President Jerome Powell insists that this is a technical adjustment, but the measure was not sufficient to reduce the tension. The mechanism will now remain at least until January.

The disturbing thing is that the reason for this tension is not well explained. It was initially attributed to the convergence of various public debt auctions and the payment of taxes by large companies. Powell continues to support this theory. However, it also reflects that the Fed has been too quick in the budget reduction process to bring it to a more normal level. This will force him to resume purchases of letters from Teroso next Tuesday.

The plan is to accompany the "repurchase agreement" with an extension of the reserves at a rate of 60,000 million dollars in the first month, until the second quarter of next year. The Fed currently has assets valued at around four billion dollars. Powell insists that this is not a new rate reduction through quantitative means and that the aim is to bring liquidity reserves to a level that gives them flexibility, to satisfy the market's credit demand.



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