The Fed is worried about what happens when everyone rushes for the exit

Wednesday, February 18, 2015
By Paul Martin

Feb. 18,2015

The Fed is sounding the alarm on liquidity risks.

In the Minutes from the January FOMC meeting, the Federal Reserve addressed the financial situation, and noted that the increasing role of bond and loan mutual funds could pose a liquidity risk if everyone tries to get out of the market at the same time.

Here’s the relevant passage, first flagged by Bloomberg’s Matt Boesler:

“Finally, the increased role of bond and loan mutual funds, in conjunction with other factors, may have increased the risk that liquidity pressures could emerge in related markets if investor appetite for such assets wanes.”

And so what the Fed is basically saying here is that because investors are using mutual funds to invest in bonds, instead of owning the bonds, there could be a problem if investors all want to leave at the same time.

The Rest…HERE

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