The US Federal Reserve has once again tightened too much. It continued to sell bonds and unwind quantitative easing (QE) on self-described “autopilot” for at least a year too long.
It brushed aside ever louder pleas for liquidity from traders and market makers working at the coal face of the financial system.
By last week this tightening process had caused usable “excess reserves” (a misnomer) held at the Fed to shrivel to barely more than $300bn, and the operative word is usable. The engine has been running on fumes.
That was the backdrop – if not the trigger – for the seizure in the overnight lending markets. Nor is it over yet. The New York Fed had to inject another $66bn on Monday.
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