Tuesday, September 16, 2008

Money Markets in a Panic, As Turmoil Continues

The Fed injected $50 billion in liquidity into the money markets to counter a spike in the overnight repo market.  The overnight repo rate opened at 5.75% as banks scrambled to find financing from reluctant lenders.  The panic in the capital markets continues unabated.  The repo rate declined once the Fed intervened in the money markets with extra liquidity.  This injection was earlier than the Fed ordinarily conducts its daily money market operations, indicating they stand ready to act again if necessary.  The Fed's actions followed on the heels of liquidity injections by other Central Banks around the world.
I believe it is virtually a foregone conclusion that the Fed cuts the fed funds target and the discount rate today by 50 basis points.  Although this will probably weaken the dollar and is not an ideal act, it is a better option than watching another financial institution implode.  A 50 basis point cut should help the banking system by lowering financing costs, although the seizure in the money markets may continue for some time, particularly over year end.  Everyone send a thank you note to the rating agencies for helping this situation along with their extremely tardy downgrade of AIG and WaMu yesterday after the market's plunge.  

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