Liquidity Injections and GRE Portfolio Caps

A lot of ink has been wasted talking about our Federal Reserve and Central Bank's around the world injecting liquidity into the market over the last few days. The WSJ had a nice breakdown of some of the activity:
Reading about these liquidity injections sounds scary, but they are not a big deal. While the Fed is currently targeting a Federal Funds rate of 5.25%, the actual rate moves with the market and the Fed must use open market operations to keep the overnight rate as close to 5.25% as possible. When it drifted up towards 6% on Thursday/Friday the Fed acted to bring it back in line. If you go to the NY Fed website you can see that this activity is very normal. The Fed has intervened 25 times since July 19th, the only difference over the last 3 days has been the increase in volume and the statement that the Fed released. All of these operations are temporary "Repo's" and represent nothing more than 3 day loans to banks at 5.25% with MBS as collateral.

The second piece of information that has been floating around is the potential to restore calm to the market by raising the GRE portfolio caps allowing Fannie Mae and Freddie Mac to buy loans above the current $417,000 conforming limit. While this is certainly an option, there is no need to jump to this conclusion now. The OFHEO has already released a statement that they have no intention of raising the caps at the present time.

At a volatile time like this in the market non-news can seem like a big deal. But, after a closer look really not be that big of a deal at all.

Hat Tip: Calculated Risk