Liquidity Squeeze

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DEFINITION of 'Liquidity Squeeze'

When concern about the short-term availability of money causes reluctance among financial institutions to lend out money from their reserves. This hold on reserves causes the interbank market rate to rise, making it more expensive for banks to borrow from each other. Ultimately, this causes credit standards to tighten, making it more difficult and expensive for consumers to receive loans.

BREAKING DOWN 'Liquidity Squeeze'

In order to limit the impact of liquidity squeezes, central banks will often increase liquidity by injecting more money into the economy through lower interest rates. Doing so gives financial institutions a less expensive alternative to borrowing. This process also serves to alleviate the fear of insufficient liquidity in the short run and make bank loans more accessible to consumers and businesses.

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RELATED FAQS
  1. How do central banks inject money into the economy?

    Central banks use several different methods to increase (or decrease) the amount of money in the banking system. These actions ... Read Full Answer >>
  2. What is a liquidity squeeze?

    A liquidity squeeze occurs when a financial event sparks concerns among financial institutions (such as banks) regarding ... Read Full Answer >>
  3. How is the Federal Reserve audited?

    Contrary to conventional wisdom, the Federal Reserve is extensively audited. Politicians on the left and right of a populist ... Read Full Answer >>
  4. Who decides when to print money in the US?

    The U.S. Treasury decides to print money in the United States as it owns and operates printing presses. However, the Federal ... Read Full Answer >>
  5. How can the federal reserve increase aggregate demand?

    The Federal Reserve can increase aggregate demand in indirect ways by lowering interest rates. Aggregate demand is a measure ... Read Full Answer >>
  6. How does the stock market react to changes in the Federal Funds Rate?

    The stock market reacts to changes in the federal funds rate in various ways depending on where it is in the business cycle. ... Read Full Answer >>

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