Excessive cash in the U.S. financial system puts pressure on the Fed’s policy interest rate

Analysts said the Fed may need to re-adjust its policy tools because the large amount of cash flow through the US financial system makes it difficult for the central bank to maintain strict control over its policy interest rate.

Since the beginning of this year, short-term interest rates have fallen to historical lows as cash-filled financial institutions compete to borrow them into ultra-low-risk instruments, such as US government securities that mature in the near future. Repurchase agreement.

Obviously, the demand is very large and cannot be satisfied. . . Teresa Ho, a strategist at JPMorgan, said that as of April, there was a gap of $751 billion in the supply and demand market.

The surge in liquidity stems in part from the Federal Reserve’s asset purchase program, which buys $120 billion in US government debt every month.Bank savings Transfer Access to money market funds and the Treasury’s plan to cut its record cash reserves and pay for funds related to the recent stimulus package passed by Congress have also increased the reserve balance.

At the same time, the department has withdrawn the issuance of Treasury bills that expire in a year or less, which has reduced the supply of key assets used to store cash.

A large amount of cash has been returned to Federal ReserveThe surge in demand for central bank reverse repurchase tools has provided financial companies with a place to temporarily store them. Last week’s daily usage climbed to the highest level since 2017, reaching $369 billion last Friday.

These factors pushed the Fed’s benchmark interest rate to a level that started to cause more scrutiny by analysts and investors.

The federal funds rate hovered at 0.06%, well below the median value of the 0-0.25% interest rate set by the central bank. Kelcie Gerson, a strategist at Morgan Stanley, said that keeping the offer as low as 0.05% may be enough to prompt the Fed to take action.

The Fed has Extended access To the reverse repurchase program, and Remove restrictions In order to drain the liquidity in the system and slow down the decline of short-term interest rates, financial companies can deposit their cash from 30 billion US dollars in the central bank’s amount to 80 billion US dollars.

Analysts say that the next step may include increasing the Fed’s interest payments on central bank reserves held by banks. The other is to increase the Fed’s interest rate in the reverse repurchase program.

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