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Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass

Forward Guidance

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The Effects of Reserves on Financial Stability

The Treasury is being forced to operate with a much smaller cash balance at the Fed than it thinks it's prudent. As we get closer to reserve stringency, we'll start to see little telltales in the financial system telling us that intraday liquidity is getting a little strained. We could go from a very solid cushion of surplus reserves on the eve of the debt ceiling action to an insufficient supply very quickly.

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