The large cash flow in the U.S. financial system is putting pressure on the Fed’s rate hike

The Federal Reserve may need to recalibrate its policy toolkit, analysts say, because charging money into the U.S. financial system has made it difficult for the central bank to maintain tight control over its policy rate.

Short-term interest rates have fallen to historic lows since the start of this year, as funded financial institutions are competing to borrow on very low-risk vehicles, such as U.S. government bonds or so-called ones that are coming in the near future. repurchase agreements.

“Clearly, the demand is very high, unsatisfactory… And it’s like a game of music chairs who can find the supply from the first side,” said JP Ho strategist Teresa Ho, who estimates there is a $ 751 billion supply demand in the funding markets in April.

The increase in liquidity comes in part from the Fed’s asset purchase program, which buys $ 120 billion a month in U.S. government debt. Bank deposits changing plans in the money market funds and the Department of the Treasury to save its money and pay for funds related to the stimulus package recently approved by Congress have also increased reserve balances.

At the same time, the department has pushed back when it comes to issuing Treasury bills that arrive in a year or less – something that has reduced the supply of a key asset used to save money.

Large sums of money have gone back Powered, with the central bank’s demand for reverse bank facilities – which provides a place for temporary parking for financial firms. Last week’s daily use rose to its highest level since 2017, reaching $ 369 billion on Friday.

These factors have put pressure on the Fed’s benchmark interest rate to the point where it has begun to attract more analyst and investor analysis.

The federal funds rate stands at 0.06 percent, below the central bank’s target rate of 0-0.25 percent. Kelcie Gerson, a strategist at Morgan Stanley, said the mark of up to 0.05 percent could be enough for the Fed to take action.

The Fed has already done that extended access reverse return program and boundaries raised Depending on the amount of money, financial companies can park between $ 30 billion and $ 80 billion in the central bank to drain liquidity from the system and slow down the rate at short-term rates.

Analysts say the Fed’s interest rates on banks ’reserves at the central bank could increase. Another is the rate the Fed is paying in its reverse refund program.

“The Fed is vigilant on this issue,” added economist Thomas Simons Jefferies. “They don’t want to get out of control.”