Investors are on alert for a potential end-of-year increase in US overnight lending rates, with some calling for the Federal Reserve to slow the pace at which it shrinks its balance sheet to avoid the kind of liquidity crunch that hit funding markets five years ago.
Analysts point out that the shortage of cash is in part the consequence of the end of the Fed’s policy of quantitative easing. The central bank’s balance sheet bloated to a peak of almost $9tn after the Covid pandemic, flooding the system with cash by buying trillions of dollars of Treasuries. As the Fed allows its balance sheet to roll off as bonds mature, the level of bank reserves in the system is falling.
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