The Fed's $60 billion monthly cash injections aren't enough to solve recent money-market stresses, JPMorgan says

• Money market stress isn't likely to be calmed by recent Federal Reserve capital injections, and will likely get worse through the end of the year, JPMorgan Chase analysts wrote.
• The Federal Reserve began monthly purchases of $60 billion worth of Treasurys, but the capital will likely remain with primary lenders when non-primary firms are the ones that need it most, the analysts said.
• Though some of the cash will make it to the non-primary dealers, those transfers will face the same hurdles that created the funding stress in the first place, according to the analysts.
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Recent pressures on the US money market aren't likely to be solved by the Federal Reserve's latest capital injections, JPMorgan Chase analysts wrote.

Despite the central bank's multibillion-dollar capital injections, funding stress climbed last week and shows no sign of reversing, according to the team led by Joshua Younger.

"We recommend viewing these moves as highlighting the limitations of the Fed's chosen solution to their operational issues," the analysts said.

The Federal Reserve began monthly purchases of $60 billion in Treasury bills on October 15 to further control its benchmark interest rate. The central bank has also been conducting overnight market repurchase agreement, or repo, operations since September 17 to calm money markets.

The operations directly cater to primary dealers - banks approved to purchase and borrow directly from the Fed - while non-primary dealers are left with little additional liquidity, according to the analysts. The non-primary firms "are the most acute source of stress in repo markets" and are set to take on additional burden as new reserves pile up with the firms that need them less, the analysts said.

"With year-end coming up, this is all likely to get much worse, in our view, before it gets better," they added.

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Though some of the new reserves will make it to the non-primary dealers, that cash will face "the same frictions" from balance sheet hurdles and day-to-day liquidity regulations that created the funding issues in the first place, the team wrote.

A scarcity of lenders led yields to spike in September and move the interest rate outside of the Fed's intended range. The spike prompted the central bank to begin its capital injections and bolster liquidity in the lending market.

The Federal Open Market Committee next meets October 29 to discuss monetary policy and potentially bring another interest rate cut. An additional cut would signal increased concern around economic slowdown and the impact of global trade tensions.

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