The Fed Is Doing Something It Hasn’t Done Since the Financial System Nearly Crashed in 2008Paul-Martin Foss
The Fed’s rate cut last week was supposed to operate like clockwork. Everyone expected the 25 basis point cut, it was merely the next step in what will likely be a continuing series of cuts, and there was no anticipation of anything unusual. Yet what ended up occurring has rattled markets and left many observers wondering how weak the economy really is.
Unless you’re a hardcore observer of financial markets, you’ve probably never heard of overnight repo markets. Those are markets in which firms borrow money overnight in order to cover positions, make payments, etc. The money is paid back the next day with interest.
Normally the interest rate on those transactions is around the target federal funds rate. That means 2-2.25% before last week’s cut, and 1.75-2% after the cut. Yet interest rates last week spiked to nearly 10%. That meant that the Fed’s monetary operations weren’t able to control markets the way they should have, leading to many leveraged firms having to pay more money than they expected. That’s an ominous sign for the future.
While the Fed eventually got interest rates back under control, it instituted an ongoing series of liquidity operations, pumping more money into the financial system. On Tuesday alone the Fed pumped $105 billion into the financial system to shore things up and keep interest rates low. That’s a pretty significant amount of money.
But what’s really concerning is that the Fed’s total lending for 1-day repo operations has been $75 billion per day over the past week. If you look back at September 2008, when the bank bailout was being debated and all of Washington and New York were crying out that the financial system was on the verge of complete collapse, the Fed’s maximum repo lending was $105 billion in a single day, the highest amount of overnight repos it engaged in was $100 billion in a single day, and most days saw no more than $70 billion in overnight repos.
That means that the Fed is now pushing as much or more liquidity into the financial system through its current repo operations as it did during the most acute part of the financial crisis in 2008. It was only weeks after that massive Fed lending back then that the bank bailout was passed, to the tune of $700 billion. If the Fed is doing as much now as it was in September 2008, does that mean that we’re on the verge of yet another financial crisis, and one that will rear its head in only a few short weeks?
If nothing else that has happened this year has spurred you to protect your retirement assets, this event should. It’s underreported and underappreciated by the financial media, but it could be vitally important to your future financial health. Unless you protect your retirement assets today, the next crisis could sneak up on you before you know it and ruin your hopes for a peaceful and comfortable retirement.