Dancing with Fire - The Fed and Repo Rates

Author: Corey McDowell - Economics Editor

Published: 7 Oct 2019

Last Updated: 8 Oct 2019

Contents

The US Fed Chairman Jerome Powell has plenty on his plate to keep him busy. 

One massive issue for Mr Powell is repo rates between American banks: these rates have hit levels not seen since the 2008 Financial Crisis. Repos are officially called “repurchase agreements” and are basically short-term loans between banks to manage the flow of money and repo rates are the interest rates charged on these loans. 

Over $1 trillion flows within the repo system, so any sudden fluctuation in the repo rate can have significant knock-on effects on the wider economy. On the 17th September, a shortage of funds in banks caused repo rates to skyrocket to 10%, a level last seen over 10 years ago. This situation is especially worrying for Mr Powell as the Fed had been scaling down its reserve balances, and the unexpected spike in repo rates forced the Fed to intervene in these markets to relieve funding pressures. 

On October 2nd, the Fed injected $42.1 billion into the repo system, on top of the $110.1 billion made available on September 26th. Mr Powell has indicated that Fed intervention in the repo market will continue until early November. This massive market intervention is a sign that not all is well within the US economy, which could possibly see the price of gold rising in the next couple of weeks.

Further Reading

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