What ongoing repo turmoil means for banks
WASHINGTON — The Federal Reserve’s injection of billions of dollars starting in September seems to have stabilized an unsteady repurchase agreement market, but the banking industry could feel the repercussions of that intervention for some time.
On Sept. 16, the interest rate on overnight repo agreements spiked, surging from around 2% to over 10% before the Fed stepped in. The Federal Open Market Committee, which sets the central bank’s monetary policy, ordered the Federal Reserve Bank of New York to buy up to $75 billion in Treasury bonds in the repo market and authorized three issues of two-week repo transactions, up to $35 billion each.
But those transactions alone have not quenched demand for low-interest liquidity, and so the central bank has issued additional term repo offerings — most recently $25 billion worth of repo contracts last week eliciting $49 billion in bids.
Fed leaders have said repeatedly that they contained the damage from the repo spike.
“I think we have it under control,” Fed Chairman Jerome Powell told Congress last month. “We are prepared to continue to learn and adjust as we do this. But it's a process. I would say it is one that doesn't really have any implications for the economy or for the general public, though.”
But it may very well have important implications for banking and financial services, and it certainly has important implications for the Fed’s ability to enact monetary policy.