An Emergency Intervention by the Fed
San Francisco / September 18, 2019
Earlier this week, the cost of borrowing money overnight in some markets shot up to more than 10% (link). This caused a crisis. The Federal Reserve made an emergency injection of more than $125 billion. The Fed last made this type of injection in 2008.
The cause of this spike is a mystery. One thesis focuses on corporate taxes and Treasury auctions. Monday was a deadline for many companies to submit their quarterly federal tax payments. Many companies withdrew from money-market funds. Monday was also the day the Treasury Department's auctions of $78 billion in debt were scheduled to settle. When these auctions settled, $78 billion in cash was converted into securities. The timing of these events suddenly raised interest rates. The Fed's intervention was very useful and necessary.
How can policymakers prevent interest rates on repo markets from suddenly spiking? The Treasury can better time their auctions. That strategy might seem glib, but simplicity is a virtue.
I also wonder if the repo market can change. During the 2008 financial crisis, Lehman Brothers had trouble accessing the repo market. That contributed to Lehman's bankruptcy. The repurchase market is heavily regulated. Regulators can tinker with the rules. People are also starting companies in repurchase markets. A startup called GLMX (link) has raised over $25m since 2017 to change repo markets. This week's incident will draw more attention to the opportunity to improve how this market functions day-to-day.