What ongoing repo turmoil means for banks
By John Heltman
The Federal Reserve’s injection of billions of dollars starting in September seems to have stabilized an unsteady repurchase agreement market, but the banking industry could feel the repercussions of that intervention for some time. On Sept. 16, the interest rate on overnight repo agreements spiked, surging from around 2% to over 10% before the Fed stepped in. … Karen Petrou, managing partner at Federal Financial Analytics, said the Fed had little choice but to act fast because the repo market spike effectively threatened the central bank’s control over the federal funds rate. “What the Fed is very frightened of — and why it’s reacted the way it has — is that this means its monetary policy transmission channel is blocked,” Petrou said. “Something is happening that’s changing interest rates and making them much less accommodative.”