Reflections on the Repo-Market Imbroglio

George SelginWhile my fellow Fed-watchers have had their eyes firmly glued to the repo-market for several weeks now, I've been preoccupied with some other Fed monkey business: its plans to launch a new real-time retail payments service. Having recentlytestified before the Senate on that topic, I finally have some time to devote to add my two cents to what others have had to say about the Fed's repo-market tribulations.A Broken FloorBy the "repo-market imbroglio," I mean, for those of you who haven't been watching the repo-market at all, the Fed's struggles of late to keep short-term private-market interest rates, including both the fed funds rate and rates on private repurchase agreements (or "repos"), from rising above —if not well above—the top of its fed funds rate target range.The basic problem is that the IOER rate has been steadily losing gravity, ("gravity" being its power to keep money market rates orbiting around it) for some time. The following chart illustrates the point with reference to the effective fed funds rate:Here the blue line shows how the gap between the fed funds rate and the IOER rate, which was originally negative, has grown since mid-2018, while the red line shows the four five-point "technical adjustments" to which the Fed has resorted in order to keep the funds rate from creeping above the upper limit of its target range. On September 17th, those adjustments, at last, proved inadequate, with the effective funds rate briefly bursting through the...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs