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Rabobank analysts suggest that a standing repo facility from the US Fed would be an effective tool that could cut off spikes in repo rates, provide information on the appropriate level of reserves to prevent spikes in repo rates, and reduce the demand for reserves.

Key Quotes

“Last week the Fed started purchasing US treasury bills in order to raise the level of reserves in the financial system. While this may stabilize the repo markets in the medium term, the September turmoil has shown that the Fed lacks the appropriate tools to maintain stability in the repo market without interruption.”

“Ironically, the Fed needed an episode of repo turmoil to learn that reserves had fallen too much and to get a better estimate of how much is needed to get back to an ample reserves regime. If the Fed does not develop better tools to control the repo markets, it is only a matter of time before we get another episode of extreme repo rate spikes.”