Analysts are warning of a potential global credit crunch, citing recent actions by the US Federal Reserve as a “canary in the coalmine” indicating growing financial stresses. On October 31, the Fed injected $77 billion into the US financial system through repurchase agreements, also known as “repos”, to provide short-term loans to banks. This was the highest-ever use of the Fed’s Standing Repo Facility since its introduction in 2021. The move has raised concerns about the health of the US banking system, with some analysts suggesting that the Fed’s actions may be a sign of a looming credit crunch.
The Fed’s recent decision to end quantitative tightening, which involves selling bonds to reduce its holdings and effectively sucking money out of the economy, has also raised questions about the state of the global financial system. The US government’s sale of bonds to fund its budget deficit has put pressure on global money markets, and analysts say that the Fed’s decision to end quantitative tightening may have come too late.
Key gauges of secured borrowing, such as the Secured Overnight Financing Rate (SOFR), have risen in the US and UK, reaching levels not seen in years. The SOFR is the interest rate on the central bank’s repurchase agreements, and a higher rate indicates greater fear in the money markets of a credit crunch. Analysts say that the signs of tighter liquidity are flashing across markets, and that the Fed’s recent actions may be a sign of a broader problem.
The Reserve Bank of Australia’s governor, Michele Bullock, has played down the risk of a credit crunch, saying that the Fed’s actions are aimed at preventing such an event. However, some analysts are more cautious, warning that the Fed’s decision to inject cash into the system may be a sign of a more significant issue. The New York Federal Reserve, which is considered the banker to Wall Street, has provided significant amounts of cash to the market in recent days, including a $22 billion injection on Monday.
The situation is being closely watched by analysts and policymakers, who are concerned about the potential for a credit crunch to spread globally. The global financial system is highly interconnected, and a credit crunch in one market can have far-reaching consequences. The Reserve Bank of Australia has said that disorderly markets pose a threat to Australia’s financial stability, and will likely be monitoring developments in the US money markets closely.
Overall, while the situation is still unfolding, the signs of a potential credit crunch are clear. The Fed’s recent actions, combined with rising funding rates and signs of tighter liquidity, suggest that the global financial system may be facing a significant challenge. As one analyst noted, “the question is whether this is another canary in the coalmine,” and policymakers and investors will be watching closely to see how the situation develops.