Source: Goldman Sachs
*Pressures on US money markets increased substantially further today on a wave of risk aversion and flight to quality. The sharp rally in Treasury bills and
rise in spreads to unsecured credit appears to be rooted in a more
generalized reassessment of counterparty risk.
* The turmoil in money markets represents a sharp tightening in
financial conditions at a time when the economy is already struggling.
If it persists, Fed and Treasury officials are likely to escalate the
degree of intervention until they succeed in stabilizing market
functioning (if not market prices).
* Options for Fed and Treasury officials include 1) cutting the funds
rate (a growing possibility), 2) expanding existing liquidity facilities
(possible, though the scope is limited), 3) creating new facilities
(less likely), 4) expanding Treasury issuance (announced today, with
terms yet to continue), 5) paying interest on Fed reserves (an issue of
when rather than if), and 6) buying assets directly in the marketplace
(a last resort move).
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