In my view the conversation is intense amongst brokerage professionals who have knowledge about Fed policy as to why the Fed conducting its fourth consecutive repo operation.  Before Tuesday, the last time the Fed intervened was September 2008.

Earlier in the week Fed Chairman Powell essentially dismissed the question stating that this is part of the Fed’s function.  This is correct as in decades past the Fed intervened various times especially at quarter’s end.

By definition, the Federal Reserve is the banker’s banker, the lender of last resort.

Yes the Fed is providing the necessary liquidity but the larger question exists as too why it must now act following an eleven year hiatus.

Is it the result of regulatory fiat that has drained liquidity from the market?  Is it the result of the Federal Reserve paying interest one excess bank reserves albeit this interest rate as of Wednesday is 5 now bps below that of the fed funds target range?  Or is there something larger such as a non-bank financial suffering liquidity issues.

I do not know but I will write that if it is something of significance all will know in the next 7-10 days.  As noted several times, Credit Suisse, a firm that is prime broker for many hedge funds, stated it expects several firms to fail by month end because of the intense volatility beneath the surface that has decimated almost every trading strategy.  The only one that has not imploded is passively indexing.

All markets were mixed yesterday.  Oil was up about 1% over doubts as to whether or not Saudi Arabia can restore capacity at the pace announced.  There was little reaction to Iran’s threat of all-out war if attacked.  Nor was there much impact upon the President’s tweet saying that war might not be avoided.  Treasuries were essentially unchanged.

What will happen today?

Last night the foreign markets were up.  London was up 0.17%, Paris up 0.44%, and Frankfurt up 0.18%.  China was up 0.24%, Japan up 0.16% and Hang Sang down 0.13%.

The Dow should open nominally higher on potential trade optimism.  Oil is advancing another 1% on Middle East tensions. The 10-year is unchanged at 1.79%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.