Tags: impeachment | trump | ny fed | repo

Don't Let Impeachment Noise Distract From Fed Crisis

Don't Let Impeachment Noise Distract From Fed Crisis
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Monday, 30 September 2019 12:31 PM Current | Bio | Archive

Last week was, politically speaking, a turbulent one as President Donald Trump got definitively embroiled in an impeachment inquiry.

Nancy Pelosi, Speaker of the U.S. House of Representatives, said the House would move ahead with an “official” impeachment* effort after reports suggested that Trump withheld aid to Ukraine while he was pressing the country to investigate Democratic presidential candidate Joe Biden and his son.

This set the stage for a lengthy/complex/nasty showdown between Trump and the Democrats.

It might be helpful to recall that despite numerous impeachment investigations and votes to impeach a number of presidents by The House, only two Presidents in U.S. History have been impeached by the House, Presidents Andrew Johnson and William Clinton, but neither was convicted in the Senate and therefore not removed from office.

As things stand today, any trial in the Senate would require at least 20 Republicans to join 45 Democrats and two independents to reach the two-thirds majority that's necessary to convict.

For investors it's unclear if the impeachment proceedings will have a direct impact on the market even when President Donald Trump tweeted that the market would crash if Democrats impeach him, CNBC explained.

In my opinion, I don’t think the impeachment proceedings are a U.S. market-moving issue.

* Impeachment is the process by which a legislative body levels charges against a government official. Impeachment does not in itself remove the official from office; it is the equivalent to an indictment in criminal law, and thus is only the statement of charges against the official. Once an individual is impeached, they must then face the possibility of conviction on the charges by a legislative vote, which is separate from the impeachment, but flows from it, and a judgment which convicts the official on the articles of impeachment would entail the official’s removal from office.

Besides all this impeachment noise, today, Monday September 30, we’ll have the New York Fed’s fixing of the crucial repo or repurchase agreements lending market for banks.

Over the past several days, the Fed expanded its market repurchase agreements (repo) lending market for banks in order to be in standby for higher demand.

Today, the New York Fed added $63.5 billion to the financial system using the market for repurchase agreements, or repo to relieve funding pressure in money markets.

Banks asked for $63.5 billion in overnight reserves, all of which the Fed accepted, offering collateral in the form of U.S. Treasury and mortgage securities.

In the repo market, borrowers seeking cash offer lenders collateral in the form of safe securities like Treasury bonds in exchange for a short-term loan, the Wall Street Journal reports.

For investors it is advisable to keep an eye on what’s going on in the New York Fed’s repo market.

It’s a fact that the current "dollar scarcity" could eventually lead the Fed to start buying Treasuries again. The Fed could boost liquidity by $250 billion. You can be sure this subject will be on the agenda at the next Federal Open Market Committee (FOMC) meeting on October 29 and 30. There is already talk that the Fed could consider some short-term quantitative easing to expand its holdings of Treasurys, Reuters explained.

Now, in case the Fed would decide (it probably will) to boost its reserves with $250 billion that would be

  • Good news for ‘risk’ sentiment and
  • Somewhat less positive for the dollar.

Now, how much the dollar could weaken remains an open question.

Recently, a comment in the Financial Times put the dollar strength question in context: “A currency that yields less is normally expected to depreciate. But while the Fed leaned in the same dovish direction as other big central banks, it did so with less conviction than peers such as the European Central Bank and the Bank of Japan. Without a more emphatic shift towards more aggressive monetary easing measures from the US central bank, the dollar is likely to remain “persistently strong.”

**A repurchase agreement, also known as a repo, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and buys them back shortly afterwards, usually the following day, at a slightly higher price.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
The Fed could boost liquidity by $250 billion. You can be sure this subject will be on the agenda at the next Federal Open Market Committee (FOMC) meeting on October 29 and 30.
impeachment, trump, ny fed, repo
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2019-31-30
Monday, 30 September 2019 12:31 PM
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