“Gradually and then suddenly.”
–Ernest Hemingway
“Your ATMs are safe, your cash is safe. There’s enough cash in the financial system and there is an infinite amount of cash in the Federal Reserve.”
–Neel Kashkari, President of the Central Bank of Minneapolis
The Federal Reserve’s market activity is reaching a fever pitch.
In response to a market bloodletting that seems to precipitate new record losses every day, the Federal Reserve has responded to a somewhat unprecedented crisis with its most thorough market interventions since 2008.
Liquidity is drying up in the financial system, the economy is shutting down as COVID-19 arrests the global populace and the Fed’s only response at this point has been to pump cash into the system by buying up assets directly from banks and the Treasury, and lowering interest rates and reserve requirements to zero percent. If this fails to ballast the economy, negative interest rates may entrench themselves into our financial system (they’ve already arrived for Treasury Bonds).
The Federal Reserve’s market operations are ramping up by the day, and it’s using more tools simultaneously to “fix” markets than ever before. So what are these tools and how is the Fed using them? Where is this money coming from and where is it going?
Let’s get up to speed.
Started From the Repo; Now We’re Here
Despite some headlines and talking points that this crisis precipitated from the COVID-19 pandemic, the fact is, U.S. financial markets were suffering ailments of their own before this virus gripped the international stage.
They came in the form of repurchasing agreements, or repos for short. As I reported in September 2019[1], the Federal Reserve began open repo operations in response to rising interest rates in the overnight lending market; interest rates soared from
