The financial markets were taken Tuesday in a "perfect storm", forcing the US Federal Reserve to intervene for the first time in ten years.
This is the kind of emergency measures that recall bad memories, those of the financial crisis of 2008. The Federal Reserve was forced to inject, Tuesday, September 17, in the morning, 53 billion cash in the system for contain the level of interest rates on the repo (repurchase market): This market allows cash-strapped institutions to find the necessary cash to spend the night, temporarily giving up securities in exchange, usually Treasury bills. Low risk repo operations are financed at a rate that is expected to evolve as the Fed's key rates, in a range of between 2% and 2.25%. But these repo rates rose sharply, reaching 6% Monday afternoon and 10% Tuesday morning.
Financial markets have been caught in what the Financial Times call a "Perfect storm", forcing the Fed to intervene this way for the first time in ten years. Clearly, there was no more money at a reasonable price and the central bank of New York had to put in emergency available 75 billion of liquidities (53 were consumed).
Nervousness of the markets
There are many explanations: First, US companies had to pay their taxes on September 15th, which reduced the amount of dollars available. Then, the US Treasury, whose deficits fly away, proceeded to auctions that were to be settled Monday to the tune of $ 78 billion and banks, subscribing, had to consume their reserves in dollars. Finally, the same Treasury had an extremely low level of reserves with the Fed (184 billion on September 11, against 400 billion on average since 2015) and would have been tempted to raise the level of its bank account after the ceiling of debt was raised by Congress. This would explain the crisis. From a source close to the central bankers, it is said that this is a technical problem and that there is no hidden wolf. Rates had returned to normal Tuesday afternoon.
Nevertheless, the case raises concerns, as the Fed closes Wednesday, September 18, its two days of meetings. There is a debate about whether there is enough liquidity in the system. Since the crisis of 2008, the central bank had bought the debts of banks (the famous quantitative easing) to maintain liquidity in the markets, but has since backtracked and reduced the amount of portfolio holdings. As a result, banks have fewer cash reserves available from the Fed ($ 1.3 trillion vs. $ 2.9 trillion in 2014), making them more vulnerable to a sudden need for cash. Interventions of this type were frequent before the crisis of 2008, dramatizes the French economist Thomas Philippon, professor at New York Universty.
The Financial Time finally explores a last track, the jolts on the oil market that could have created a market effect. Added to this is the problem of the Saudis themselves, the kingdom being deprived of revenue in dollars with the temporary paralysis of its oil installations. To honor its expenses, Arabia could have drawn on its dollar reserves. The case shows in any case the nervousness of the markets despite the accommodative policy of central banks.