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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