US$’s liquidity crisis

The liquidity shortage is why the Fed is resuming QE. It might perpetuate the equity bubble for a few more months until bond yields start rising again. Maybe not.

At the October FOMC meeting, the Fed Funds Rate was cut by ¼% to a new target rate between 3.75%—4.00%, and quantitative tightened was abandoned to be replaced by quantitative easing. Effectively, it was an admission that credit in the markets is too restrictive, which combined with the most recent Beige Book indicating that the economy might be stalling, was sufficient for the Fed to abandon inflation-targeting in favour of its other mandate — protecting employment.

Much has been written about the plumbing in the monetary system and why there is a liquidity crisis. But rationalising it, the credit liquidity problem is being triggered by US Treasury borrowing, which relies heavily on short-term financing. It is sucking liquidity out of markets.