Federal Reserve Bank of Dallas President Robert Kaplan is raising alarm bells over the Fed’s recent injections of liquidity into financial markets. Kaplan said recently that it is wise to acknowledge that “Many market participants believe that growth in the Fed balance sheet is supportive of higher valuations and risk assets.”
The Wall Street Journal’s Michael S. Derby reports:
“Many market participants believe that growth in the Fed balance sheet is supportive of higher valuations and risk assets,” Mr. Kaplan told reporters after an appearance at the Economic Club of New York. When it comes to worries Fed actions are driving up stocks, he said “I’m sympathetic to that concern” and added “I think it’s wise to acknowledge it and be cognizant of that concern as we think about our next actions.”
Mr. Kaplan was addressing the central bank’s ongoing effort to ensure money markets have enough money to limit volatility in short-term interest rates and to keep the central bank’s federal-funds rate trading within its target range, now set at between 1.50% and 1.75%.
Last September, the Fed confronted an unexpected surge in short-term rates that many tied to a tax payment date and Treasury debt auction settlement that limited big banks’ ability to lend in what is called the repurchase agreement, or repo, market. This vast part of the nation’s financial infrastructure is crucial to broader markets and the economy.
To bring rates back in line, the Fed restarted a longstanding practice of injecting money short-term via central bank repo agreements. These overnight and longer-term interventions take in Treasurys, agency and mortgage securities in what are effectively collateralized short-term loans of cash to eligible banks.
The Fed bolstered this effort with purchases of Treasury bills in October that would permanently increase financial system reserves, grow the Fed’s balance sheet, and end the need for repo interventions by the end of this month.
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