The US Federal Reserve has added $93bn to its balance sheet, making it the largest increase in liquidity since April 2020. A significant portion of this is due to an emergency lending programme created by the Federal Reserve aimed at supporting depositors such as American businesses and households, which has added a further $53.7bn to the balance sheet. The move is seen as necessary as banks struggle under increasing rate hikes, leading investors to assume that the Federal Reserve will not be able to increase rates as planned. This could be good news for crypto and growth investments.
The Fed’s Latest Moves
The Federal Reserve has been making headlines recently with their massive additions to their balance sheet. In just the last week, they added a staggering $93 billion in liquidity, pushing their total increase to $400 billion over the past two weeks. This monumental increase is the largest since April 2020, and it comes amidst a series of actions aimed at reducing the quantitative easing that they have been working on for over a year.
The Reason for the Increase
The reason for the Fed’s increase in liquidity is to help out struggling banks that are having a tough time with rate hikes. The Fed is buying back treasuries and mortgage-backed securities, taking them at face value, which is causing them to lose money. However, they view this as a short-term solution to help banks meet the needs of their depositors. The Fed has said that this increase in liquidity is only temporary, but it has a significant effect on the market.
The Effect on the Market
The market is paying close attention to the Fed’s actions and many investors are anticipating rate cuts by the end of the year, despite the Fed’s statements to the contrary. The Fed’s debt maturing this year is expected to hit $6.5 trillion, and they will have to pay higher rates to acquire this debt. If they do not cut rates, they will go further into debt, which could cause problems down the line. Investors are watching this situation carefully, as it could have a massive effect on the market.
The Future of Interest Rates
The Fed is focused on getting inflation under control, and they will continue to raise rates to accomplish this goal. However, there is only so much they can do, and if inflation continues to come down, they will eventually have to hold rates steady, or even cut them. This would be good news for risk assets, including crypto, as extra liquidity in the system tends to cause massive run-ups in these assets.
The Bottom Line
The Fed’s recent actions have created a lot of buzz in the market, and investors are paying close attention to what they will do next. While the Fed is focused on getting inflation under control, they also need to be mindful of the debt that they are accruing. The increase in liquidity they are providing may be a short-term solution, but it may also have long-term effects on the market. Investors should keep an eye on this situation and adjust their strategies accordingly.