US Federal Reserve Reverts to Quantitative Easing Amid Bank Collapses and Stablecoin Turbulence
The United States Federal Reserve (Fed) has been in the news lately for its actions to avert a contagion following the collapse of three banks last week.
As a result, the Fed has reverted to quantitative easing, holding assets and injecting $297 billion in the last week alone. The total amount of assets held by Fed banks has increased by 3.56% in the past week, rising to $8.639 trillion from $8.342 trillion.
Observers note that the $297 billion increment over the last week was due to something other than asset purchases since last week, as Treasuries and mortgage-backed securities declined. Instead, this expansion was due to the $12 billion Bank Term Funding Program and a series of loans extended to shore up major banks. For this action, the Fed unwound what they have been trying to achieve over the last year.
The result of the Fed’s intervention is what observers call a “Fed Put,” a phenomenon where the central bank intervenes and rolls out an accommodative policy whenever there are sharp price falls in the equity markets. This “Fed Put” has been witnessed several times in the past, with the central bank intervening to shore up the economy during times of crisis.
Following the collapse of Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank, all considered crypto-friendly and aided blockchain projects in processing funds, bank stocks across the board collapsed. There was also turbulence in DAI, an algorithmic stablecoin managed by MakerDAO, one of the largest DeFi protocols. MakerDAO initiated steps to ensure DAI remains at parity with the USD, boosting MKR, the platform’s governance token.
Meanwhile, the USDC, a stablecoin pegged to the US dollar, briefly de-pegged following news that it had $3.3 billion locked up in SVB.
The recent intervention by the US government and Fed has unwound most of their tightening efforts over the last few months. As trackers show, the Fed has been gradually unloading assets from its portfolio over the past months. This was as they tightened around the economy, intervening to curb runaway inflation.
However, recent economic data revealed that inflation fell in February to 6%, the lowest in over 15 months. This contraction in consumer prices was in line with market expectations and suggests that the Fed’s tightening around the economy may have been successful.
In conclusion, the Fed’s recent actions have drawn attention to the “Fed Put” and the central bank’s role in supporting the economy during times of crisis. While the intervention has undone most of the tightening efforts of the past few months, recent economic data suggests that the Fed’s actions may have been successful in curbing runaway inflation.
As the situation continues to evolve, it remains to be seen what further actions the Fed will take to support the economy and stabilize the markets.