The Federal Reserve has "done its best," but key corners are flashing red!
Just after the Federal Reserve announced bond purchases to inject liquidity, the critical overnight repurchase rate soared again on Monday! This has raised questions on Wall Street: Are the Federal Reserve's actions "too slow" or "not enough"?
The rise in this rate to about 3.8% is a sign that the short-term financing market is reacting lukewarmly to the Federal Reserve's liquidity injection measures.
These rates continue to face upward pressure, indicating that the financial system may be struggling with insufficient short-term financing liquidity. The rising cost of borrowing could lead to potential market turmoil, similar to what investors experienced at the end of 2019.
The question is whether the Federal Reserve has done enough, or whether its actions are fast enough.
I believe the Federal Reserve thinks it has done its utmost, exerted all its effort, but the market still feels tense.
The persistent pressure could spread and evolve into a kind of "contagion," leading to increased volatility in short-term government bonds and other asset classes.
If liquidity conditions remain slightly tight by the end of the year, I would not be surprised. The distribution of reserves in the system is not uniform.
The recent rise in the overnight rate is the result of a "technical issue," and that part of the market has "not experienced any abnormalities." In his view, the Federal Reserve has currently resolved the liquidity issue.