There are only a handful of global experts on how eurodollar markets, dollar swaps, shadow banks and money market funds interact with central banks. International monetary and economic expert Robert McCauley, a senior research associate at the Global History of Capitalism project, is one of them. He’s sent us a useful account of the extraordinary moves central banks like the Federal Reserve are now taking to stabilise securities markets and how exceptional they are in relation to recent precedents.
A key observation is that while the Fed hasn’t yet exhausted its options in this arena, some of the moves it is now experimenting with are on the verge of opening a new chapter in central bank support for securities markets.
McCauley cautions, however, that the objective shouldn’t just be security price support. This especially applies to the corporate bond market, where a sudden dearth of dedicated market makers for bond ETFs (known as authorised participants) is creating an urgent need for the central bank to step in as authorised participant of last resort in a bid to maintain market liquidity.