Fed’s repo facility funds dwindle amid market volatility and increased Treasury borrowing

As the U.S. stock market stumbles and Treasury borrowing amplifies to address the government’s substantial budget deficit, the Federal Reserve’s overnight reverse repo facility, a crucial liquidity indicator, has witnessed a significant decline in funds from institutional investors. The funds have dropped from $2.5 trillion in December to $1.1 trillion now.

This decrease is concurrent with the and Index edging towards correction territory and a forecasted rise in Treasury debt issuance to finance an estimated federal budget deficit of $1.7 trillion for FY2023, a 23% year-on-year increase. Wall Street is also preparing for an additional $1.5 trillion in Treasury borrowing needs.

In response to these developments, the Fed is anticipated to keep its policy interest rate at a 22-year high of 5.25%-5.5%.

This situation is unfolding amidst volatility in the U.S. stock and bond markets, a projected 2.2% weekly drop in the , and significant expected losses in both the communications services and energy sectors of the S&P 500. The benchmark remains steady at 4.84%, after recently spiking above 5%, a level not seen since 2007.

Furthermore, the Nasdaq Composite Index is down by 2.9% for this week, while the Fed continues to maintain its focus on its 2% annual inflation target.

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