The Federal Reserve is facing urgent calls to find a permanent fix to short-term funding strains that unsettled markets last month, and avoid another bout of volatility at the end of the year when the demand for cash is expected to rise again.
Traders were shocked in September when the typically staid market for repurchase agreements — where banks and investors borrow money in exchange for Treasuries and other
high-quality collateral — went haywire. The “repo” rate jumped as high as 10 per cent, prompting accusations that the Fed had lost control of short-term interest rates.
A series of cash injections by the central bank brought the rate back down, but policymakers and investors are pushing for a longer-term answer to the market’s problems.
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“[The Fed] is doing the right things right now with the short-term repo facilities, but it is merely buying time,” said Bill Campbell, a portfolio manager at investment firm DoubleLine Capital.
Market participants have coalesced around one answer: asset purchases. When the Fed buys Treasuries from the market, it simultaneously credits banks’ reserve accounts to pay for them, increasing the amount of cash in the financial system. But opinions remain divided on how much debt the central bank should buy and at what maturities.
There is, at least, general agreement that something fundamental needs to be done. At the worst of the market stress, a series of daily $75bn cash injections morphed into $100bn overnight operations and three two-week loans, with banks’ appetite for funding initially outpacing what was on offer from the Federal Reserve Bank of New York.
