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The Wall Street Journal Rounds Up Opinion on the Liquidity Event

The Wall Street Journal writes:

Economics Blog : Economists React to Central Banks’ Moves: This morning, the ECB allocated about $130 billion in a one-day quick tender to calm jittery markets. The scramble for liquidity in Europe spilled over into the U.S.: The Fed, in an effort to get the federal funds rate back down to its target 5.25% and meet the spike in demand for cash, twice entered the market today to inject cash.

Economists and others react to the developments....

The Fed’s actions to this point appear designed to emphasize that the latest wave of fear in the markets is short-term in nature and, at least for now, centered more in Europe than in the United States. … In coming days, the Fed will probably continue to try to walk a fine line between providing what it judges to be sufficient liquidity, on the one hand, and trying not to be pushed into a policy change by the market, on the other. – Goldman Sachs U.S. Economic Research

The ECB’s unusual move to inject liquidity in a one-day repo also seems to have unnerved many investors. It has even encouraged talk of emergency policy meetings to cut official interest rates – although we think this is extremely unlikely as long as underlying economic fundamentals remain strong. – Capital Economics

What is unsettling today is the failure of the Fed and the ECB to have greater foresight into the extraordinary strains that developed overnight in the European money market. The Fed’s failure to know or sense more about what has transpired in the market it controls–the money market, the banking system it supervises, and the international financial system it is intertwined with, is alarming. – Tony Crescenzi, Miller Tabak

Financial markets continue to experience distress from a sharp rise in spreads on borrowing across the whole spectrum of risk classes, combined with a sudden reduction in appetite for investing in these assets. This credit squeeze recently entered a new, and potentially more dangerous phase, with a sharp increase in inter-bank lending rates in Europe.... The European Central Bank stepped in to add liquidity today, and we expect the Fed will also add short-term liquidity to the financial markets in the very near future. This will not yet signal a change in monetary policy, or administered rates – we expect the Fed funds rate to remain unchanged. A deeper, or persistent credit crunch might lead to a rate cut, but the first mission of the Fed is to maintain market liquidity. – Brian Bethune, Nariman Behravesh and Nigel Gault, Global Insight Inc....

Developments over the past day highlight the changing nature of the credit market adjustments roiling financial markets. The concern in recent days that short term liquidity for financial institutions might dry up became something of a reality in European markets. Commercial paper and repo markets dried up, pushing up overnight rates significantly.... The drying up of short-term liquidity to financial institutions is a more serious concern to central banks than the shutdown in term credit financing as credit reprices in a disorderly fashion. As a result, the ECB took action in order to protect the functioning of the Euro area money markets. – Bruce Kasman, J.P. Morgan