The United States Federal Reserve is all set to wade into the US Treasury Bill market in a big way and could end up owning as much as 12% of the existing market. The estimates have been provided by forecasting firm Oxford Economics. Considering the current threats to the economy and dangers of the United States finding itself in a cash crunch, the move from the Federal Reserve is not particularly surprising.
The spike in the short term lending rates in September had caused a lot of panic in the markets and led to substantial cash crunch. The Fed now wants to make sure that there is no repetition. The Fed has already spoken about its intentions with regard to buying US Treasury Bill earlier this month. According to the announcement of the Fed, it would buy $60 billion worth of Treasury Bills every month. This is going to continue until the second quarter of 2020, and the Fed hopes that the market would be stabilized significantly by that time.
According to well-known rules, the Fed credits an equal amount in reserves to commercial banks when it buys Treasury Bills in order to boost its balance sheet. This action by the Fed will, hence, results in boosting the cash reserves of leading commercial banks, which are at the center of the short-term lending market. This strategy will ensure that the banks have the cash necessary to service the short term lending market that forms the bedrock of the financial system. More importantly, the Fed also hopes that the measure will bring more spikes in the interest rates for short term lending either.
