January 24, 2022

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Fed wages furious battle to unclog financial markets

That comes on top of efforts to ensure smooth trading in key markets for U.S. government bonds and mortgages, such as by offering massive temporary cash injections and pledging to buy billions in Treasuries and mortgage-backed securities.

More actions are likely to follow, but without more drastic steps by Congress and the administration, its efforts might not be enough to avoid a broader breakdown in markets. Mnuchin and President Donald Trump outlined several ideas under discussion at the White House briefing.

“The Fed’s liquidity injections appear not to be working,” Zoltan Pozsar, a managing director at Credit Suisse, said in a note Tuesday morning. “All segments of funding markets … continue to show growing signs of stress. The Fed may have to do more still.”

The stock market has whipsawed wildly over the past several weeks, with the Dow Jones Industrial Average on Monday reporting its worst point loss in history and its biggest percentage-point drop since 1987. The Dow steadied on Tuesday and went up a bit following the Fed’s latest action and a White House progress report on a rescue package.

Still, Bank of America Global Research said investors continue to be stingy about extending credit and there are concerns about the stability of various parts of the financial system.

“Markets remain in a fragile state and will likely continue to do so until there is greater certainty around the path of COVID-19 outbreak and the fiscal policy response from governments around the world,” the bank said in a report.

The Fed acted Tuesday to unclog the market for short-term business debt, with financial experts worrying that mounting problems there could spread and cripple other types of lending.

“By ensuring the smooth functioning of this market, particularly in times of strain, the Federal Reserve is providing credit that will support families, businesses, and jobs across the economy,” the central bank said in a statement

Treasury will provide $10 billion of credit protection for the purchases from its Exchange Stabilization Fund. Businesses that want to use the facility must pay a fee to register.

Companies rely on the market for so-called commercial paper for quick funding, but mutual funds, a traditional buyer of the debt instruments, have been selling to make sure they have enough cash in case many of their customers are looking to withdraw money.

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