In yet another unprecedented attempt to keep the air in the financial bubbles, the Federal Reserve announced the establishment of an international repo facility.
The repo facility will allow foreign central banks and other international monetary authorities to enter into repurchase agreements with the Federal Reserve. According to the Fed announcement, FIMA account holders can temporarily exchange their US Treasury securities held with the Federal Reserve for dollars that can then be made available to institutions in their jurisdictions.
This facility should help support the smooth functioning of the US Treasury market by providing an alternative temporary source of US dollars other than sales of securities in the open market.”
These repo operations are similar to those launched in the domestic market last fall. Repurchase operations make up an important aspect of the banking system. The repo market enables banks to borrow cash in order to maintain liquidity and meet daily needs. In a repo trade, banks and other firms use Treasurys and other “high quality” securities as collateral for short-term loans. The bank then repurchases the bonds paying a nominal rate of interest.
The fact that the Fed is creating an international repo facility indicates the extreme instability in the global financial system.
The Washington Post explained the reason for the Fed’s latest intervention in the financial markets.
The goal of this latest Fed action is to prevent foreign central banks from selling their US Treasury holdings in a rush. There was so much panic selling in mid-March that investors were often selling both stocks and bonds, a highly rare situation, as typically investors flee stocks and run to the safety of bonds.”
A massive sell-off of US Treasuries would be disastrous at this point. The Fed is desperately trying to hold interest rates down through its quantitative easing program. The Fed’s entrance into the bond market creates artificial demand, pushing bond prices up and interest rates down. With the US Treasury already set to borrow trillions of dollars to fun the recently passed stimulus bill, the last thing the Fed needs is foreign investors selling Treasuries and driving interest rates up.
In simplest terms, the Fed is injecting itself into the market to suppress interest rates. Market forces want to push interest rates up to attract funds. The Fed is intervening by creating money out of thin air to artificially suppress them.
Keep in mind, the Fed began running repo operations in the US last September. That’s a signal that there was already significant rot in the financial system long before the coronavirus pandemic.
The Federal Reserve calls the new FIMA repo facility temporary. It also claimed its domestic repo operations short-term, but even before the coronavirus meltdown, there was no sign of an exit strategy.
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