Bloomberg: US Treasury cash moves could lead to lower interest rates

Yellen Shift on Vast Treasury Cash Pile Poses Problem for Powell
Rich Miller and Liz Capo McCormick
Tue, February 16, 2021

Already low short-term interest rates are set to sink further, potentially below zero, after the Treasury announced plans earlier this month to reduce the stockpile of cash it amassed at the Fed over the last year to fight the pandemic and the deep recession it caused.

The move, which aims to return its cash position at the central bank to more normal levels, will flood the financial system with liquidity and complicate Powell’s effort to keep a tight grip over money market rates.

While the Fed has pushed its benchmark overnight policy rate down to nearly zero to aid the pandemic-inflicted economy, a drop in short-term market rates into negative territory could prove disruptive, especially for money market funds that invest in short-dated Treasury securities. Banks may also find themselves hamstrung by effectively being forced to hold large unwanted cash balances at the central bank.

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