The Fed Needs to Tread Carefully in Twitchy Money Markets
Banks are getting closer to becoming more vulnerable to tipping points in liquidity and lending capacity.
Keep watch, Federal Reserve.
Photographer: Stefani Reynolds/Bloomberg
It might not be time to really get nervous about US money markets, but it’s definitely time to pay more attention. Signs of strain emerged as September turned into October this week — it wasn’t completely wild, but the tensions were the worst since early 2020.
The Federal Reserve isn’t yet concerned, but still this shouldn’t be happening right now. This week’s jump in borrowing costs suggests a couple of scenarios: Either large banks need more spare cash than the Fed has assumed, in which case it will have to halt its quantitative tightening sooner than it plans; or there are blockages in the financial plumbing that mean banks’ reserves aren’t as mobile as they should be and the central bank needs to work out why.