You’re right about those daily injections — they’re sometimes referred to as “temporary liquidity”. Of course, these injections are taking place alongside the Fed’s program to accumulate permanent reserves by buying up billions of Treasury bills per month in addition to steadily declining interest rates. What is moreso a concern is the overall trend — why does the market seemingly require so much liquidity out of the blue? The fact that the Fed has to step in with hundreds of billions for one day because the private market either doesn’t want to lend or doesn’t have the necessary reserves shows that conditions are not stable. Particularly if the market can’t survive without them now — they’re coming daily.

It’s also indicative that the Fed didn’t see this repo crunch approaching and doesn’t know precisely where it’s coming from which is concerning.

And frankly, if the government stops with their injections, firms could have failed, and quickly. Most of them really depend on the overnight repo markets so if the rates are at 10% and climbing, some institutions simply will not be able to pay this amount. And then what? And the lending institutions, despite the appeal of a higher interest rate, would get cautious and panicky, afraid that they won’t get paid back. So the Fed knew that it had to intervene to get the rates back to a low range.

So while the repo market is usually stable, it can dry up pretty quickly if firms start doubting one another. This is what happened before — in 2008 Bear Stearns began their downfall when it was revealed risky securities on their books started to fail and no one wanted to lend to them. It’s a cautionary tale.

Hope this answered some of your questions!

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Writer of economics, psychology, and lots in between. laurennreiff@gmail.com

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