Interesting day today, the Fed is backed into a corner. We will see how they attempt to get out of this self made corner. By now you should know there are some VERY serious overnight funding problems. Overnight funding has been taken for granted for years, only back in 2008-2009 did serious problems arise. Now 10 years later (while the Fed is easing) it is becoming a problem again. What started as a synthetic short of dollars has become systemically threatening. In fact, one could now call overnight funding the actual foundation to all credit markets.
Bottom line, the Fed will be forced to expand their balance sheet to fund the illiquidity. As reserve currency holding up all things financial, this situation should never have happened …but it has. Markets are now taking on the Fed and forcing them to do exactly what we said they would, namely, forcing the Fed to restart QE! They can call it whatever they want, QE, QE lite or even Spaghetti O’s, the fact is the Fed is now forced in to expanding their balance sheet. I remind you the Fed is operating on very thin equity …soon to become even thinner versus holdings.
“Don’t fight the Fed” has been the saying forever but times are changing. It seems to me markets are finally taking the Fed on. As it stands, they appear to have lost control of short term funding rates. All bets are off from here and I believe it will not be long before markets rebel even with QE, more rate cuts etc. Their greatest nightmare will be when markets panic in RESPONSE to “Fed help”. At that point, we will see true and very real fear because if “Daddy” cannot bail out the banks/financial markets, who will? Re set in 3…2…1?