The New York Federal Reserve adjusts the rate at which banks borrow from each other through the use of repurchase agreements or ‘repos’. In doing so, the Fed purchases Treasuries from banks with the intent to inject money into the banking system. This then decreases the need for overnight lending between banks and moves the overnight lending rate toward the published target.
Last night, a shortage of cash among banks caused the overnight funds rate to spike to 10%. The exact cause of this spike is uncertain but large withdrawals made by corporations to pay their quarterly taxes were a factor. The fed quickly stepped in and purchased $53 billion of securities from these banks and effectively moved the rate toward its target.
Many outlets quickly drew sensational parallels to the financial crisis where a similar spike occurred. It’s worth noting that in 2008 the Fed may not have been as prepared and did not react as quickly to financial anomalies as it is now. With equity markets only down slightly it appears that the Fed is more prepared to deal with financial anomalies.
It’s our philosophical belief that one cannot time the market. Even if the media’s sensational take on this event plays out to be true, we don’t believe one should modify their investment mix for reasons outside of their predetermined objectives.
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