On the heels of a frantic weekend during which the Swiss government orchestrated a historic shotgun wedding between UBS and Credit Suisse, the Fed on Sunday announced a coordinated, global effort to ensure dollar liquidity gets to where it needs to go expeditiously.
It’s glaringly obvious that central banks and finance chiefs across the Western world are concerned about the potential for a mini-financial crisis. If that’s too strong (and it probably is), suffice to say there’s a disconnect between, on one hand, the level of consternation among officials and, on the other, everyday people, a group which includes investors unaccustomed to reading between the proverbial lines. In this case, swap lines.
The Fed’s Sunday evening announcement found all parties to the standing arrangements (so, the BoC, the BoE, the BoJ, the ECB and the SNB) increasing the frequency of their operations to daily from weekly. The daily operations start tomorrow (or today, depending on where you are) and will run through “at least” the end of next month.
This reflects concern about friction in short-term dollar funding markets. Put another way, it’s a testament to my warning from “Signs Of The Financial Apocalypse,” a warning I reiterated here on Sunday morning. If the current storm starts to manifest in broader funding stress and wider bases, then it’s a problem. The swap lines are designed to help address those kinds of problems.
You can add the central bank liquidity swaps series to your list of must-watch weekly releases from the Fed, alongside discount window usage and the take-up in the newly-created bank term lending facility.
Between this not-so-subtle nod to dollar-funding stress and the readily apparent demand for liquidity domestically among US regional banks, the Fed will have a difficult time crafting a coherent message around any rate hike that might be coming on Wednesday.
If the Committee were to go through with another hike and the banking crisis were to worsen while inflation receded on the back of collapsing demand amid a sharp deterioration in confidence among businesses and consumers (not to mention tighter lending standards at most banks), the March FOMC meeting could live in infamy as an example of central bank cognitive dissonance. That’d be especially true if any recession were to go beyond what might be “desirable” to curb inflation.
Of course, if the Fed doesn’t hike, inflation stays elevated and the banking crisis quickly abates, the March FOMC meeting could likewise live in infamy as an example of cowardice and retreat at the first real sign of trouble. That’d be especially true if inflation doesn’t moderate anywhere near target by year-end.
There are no great options for Wednesday’s policy gathering in the US. At this point, officials are just hoping the next three days are some semblance of calm and orderly.
