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A Shift in Approach Could Help Keep Short‑Term Markets Liquid
Since overnight lending rates in the U.S. spiked as high as 10% during trading on 17 September, steps taken by the New York Federal Reserve and the Federal Open Market Committee (FOMC) to inject excess cash into the financial system have succeeded in calming funding markets. However, the episode is a stark reminder of an unintended consequence of post-crisis regulations. Large banks in the U.S. now operate with greater levels of capital and liquidity, which makes the system sounder, but regulations have also reduced the efficient flow of cash through the financial system and constrained the Fed’s ability to further ... (full story)