U.S. Outlook: Sleepy Money Market Wakes Up From Its Hibernation

Scott Anderson
Posted by Scott Anderson
Chief Economist

It’s all about bank reserves and the demand for liquidity. This week money market rates went haywire for the first time since the early days of the financial crisis.

The overnight repo rate spiked to almost 10.0% on Tuesday, but that wasn’t the only overnight money market rate to shoot higher.

The Fed funds effective rate also moved above the Fed’s 2.25% upper bound at 2.3%.

While the Secured Overnight Financing Rate (SOFR), eyed as a future replacement for the Libor market, jumped to 5.25% from 2.43% the day before.

The Federal Reserve quickly intervened to restore calm and bring overnight interest rates back under control by conducting daily overnight repurchase agreements, collecting collateral from banks, like Treasury securities, in exchange for reserves.

On Tuesday, the Fed conducted a repo operation adding about $53 billion in reserves. On Wednesday, that amount increased to $75 billion, and every day since then the Fed has conducted a daily repo operation of a similar amount. The fact that these repo operations are only overnight means the Fed must continue to rollover similar amounts everyday as long as there is surplus demand for reserves from the banking system.

For more, see the full U.S. Outlook, delivered on September 20.

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