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Keeping an Eye on Liquidity as Risks Converge
Declining cash reserves across the US financial system have some market observers predicting a liquidity crunch in the funding markets. We disagree. To understand why, it helps to understand how we got here. The Federal Reserve’s Balancing Act In 2020, in response to the COVID-19 crisis, the Federal Reserve ensured liquidity in the economy by buying massive amounts of Treasuries and mortgage-backed securities. This quantitative easing (QE), along with other government stimulus measures, ballooned the Fed's balance sheet, flooded the financial system with cash and greased the economic skids. But QE eventually ... (full story)