October 28, 2019

Some interesting activity from the Federal Reserve recently flew under the radar.

The rate cut grabbed the headlines, as always.

But what was less reported was how the New York branch of the Fed pumped billions of dollars into money markets over the course of two days last month. The relief was due to a surge in short-term rates that threatened to significantly drive up borrowing costs.

Money markets saw funding shortages that made rates on one-day loans backed by Treasury bonds, known as repurchase agreements, jump as high as 10 percent. That’s four times higher than the rate from the week prior.

This turmoil caused a key benchmark for policymakers (the Effective Federal Funds Rate) to jump to 2.25 percent. Left unchecked, it would cause borrowing costs to rise across the economy.

In total, the Fed pumped $53 billion and $75 billion, respectively, into money markets over a two-day span. That’s $128 billion in all with barely a peep nationally.

Of course, financial media have covered this and pointed to several possible causes.

For instance, the Fed’s tightening program that shrank its balance sheet by $1 trillion had an effect. So did the huge amount of debt that Treasury issued. Higher bank reserve requirements were also responsible. The recent corporate tax deadline also played a role.


In truth, nobody knows what caused the spike for sure.

The consensus among policymakers is this is a temporary problem that can be corrected through the Fed’s short-term interventions.

The events we’ve discussed bring up memories of the August 2007 money market freeze-up, which hindsight revealed was not a “blip,” but a precursor to the crisis coming in 2008.

We’re starting to see more signs that everything isn’t so rosy after all.

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