In spite of news that the economy appears stable, the Federal Reserve Bank of New York (Fed) had kept on pumping liquidity into the market. Lately, they have involved an almost $58 billion repurchase repo agreement.
Fed pumps liquidity in paper currency
The Fed’s policy of repo agreements was discussed seriously before the 2008 financial crisis. These short-term collateralized loans are agreed to inject cash into banking institutions. With the securities as collateral, the loan is low-risk for the Fed but helps the bank with liquidity problems.
The recent increase in liquidity needs has been solved thanks to the rate increases in September. When rates went up, liquidity fell strongly, leading to the bank’s demand for liquid funds. For banks with strong securities books, the loans offered a speedy cash conversion, with the guarantee of recovering the underlying securities. Thanks for this. Fed has anchored the benchmark rate firmly within policymakers’ preferred range of 1.50% to 1.75%.
Trouble can be predicted
Even among those faithful to the Fed, a number of vulnerabilities are being considered. First, the fact that debt ratios have exploded is deeply concerning. Student debt, credit card debt, and unsecured debt have inearthed. It could cripple spending in the future.
Many economists argued that liquidity inflows are widely dangerous for the market. Overall, they still move funds into the market while collateralized, which could lead to strong inflation.
These inflationary pressures that come along with slowing economic output could restraint the banks. It could cause the bank to default on the loan which would put extreme tensility on the Fed, requiring them to hold the securities and take possession of the bank completely.
Even though most of these loans are short term, the banking sector has to face liquidity struggles. When the Fed fills coffers, the banks also agree to pay fees or interest on the loan based on the price of the underlying security that could put the market value of the security in an inorganic way.
The increase in Bitcoin adoption may rise
Obviously, many see liquidity moving back and forth out of the market as a dangerous action for consumers such as defaults by borrowers, loss in value, and other major market moves that could have a dramatic financial impact on the value of the dollar.
Bitcoin functions independently from the Fed rate policies and from the dollar itself. Therefore, it represents a safe haven, like gold, in times of financial fear which stands for a different track for economic change by offering government-free transactions and protecting itself against future changes. However, unlike gold, Bitcoin offers owners liquidity and independence at the same time. As transaction processing grows, this liquidity will likely increase Bitcoin adoption which could result in price growth.
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