The credit contraction we've seen and will see is massive. The credit card companies are already cutting limits, prime brokers are pulling in unused lines from hedge funds, upside down mortgages that have to be written off, it's in the Trillions, maybe tens of trillions. The Fed, the Treasury, the Bureau of Engraving can't reliquify as fast as we're contracting.
The Federal Reserve added $70 billion in reserves to the banking system, the most since the September 2001 terrorist attacks, to keep bank borrowing costs low after the bankruptcy of Leman Brothers Holdings Inc.
Fed funds traded as high as 6 percent, or 4 percentage points above the central bank's target rate for overnight loans between banks, according to ICAP Plc, the world's largest inter- dealer broker. The margin is the greatest since Bloomberg began tracking the data in 1998. The rate dropped to as low as 1.75 percent after the Fed added the temporary reserves.
The central bank uses repurchase agreements, or repos, to buy or sell Treasury, mortgage-backed and so-called agency debt for a set period, to help maintain enough money in the system to keep overnight interest rates close to the target. They don't signal a policy shift. Futures show traders boosted odds to 68 percent that the Fed will cut rates when policy makers meet tomorrow to offset financial market turmoil.
``If the fed funds rate closes high today, I would be really worried as it would mean that there really is no money out there to be lent,'' said Stan Jonas, who trades interest- rate derivatives at Axiom Management Partners LLC in New York....MORE
HT: Naked Capitalism who adds:
The Fed made a $70 billion reserve injection today in two operations in response to a sharp increase in the Fed funds rate, indicating bank reluctance to lend to each other. One reader informed us the rate was 3.75% mid-morning after the first, $20 billion addition (versus the 2% target level) and according to Bloomberg reached as high as 6% before the second Fed move.I had a related comment at MarketBeat on their post "Why Isn’t Gold Rallying More?":
Gold gained nearly 3% Monday, and somehow it doesn’t seem like enough. With the Dow industrials flirting with a 400-point loss and credit markets filled with investors aggressively dumping sinking holdings, a $22.50 rally in gold just seems to fall short of the expectations investors had for the yellow metal, generally regarded as the safest of safe havens. Gold’s rise to $787 an ounce might seem more impressive if it had not been at $1000 an ounce not long ago. “This, in fact, was the outsized event that we had to factor into the gold price equation when allowing for a repeat run to four-digits to materialize,” wrote Jon Nadler, senior analyst at Kitco Bullion Dealers in Montreal....MORE