The Fed Is Entrenched in the Repo Market. How Does It Get Out?

Since the rate on overnight repo spiked to 10% on Sept. 17 from around 2%, the central bank has been conducting overnight and term repo operations to help rebuild banking reserves, adding $237 billion of liquidity. It’s also prepared to inject up to $490 billion around Dec. 31

Intro: “In September an often overlooked but vital part of the global financial system short-circuited. It’s called the overnight repurchase agreement, or “repo,” market, and when it seized up, the interest rate that institutional borrowers had to pay for very short-term loans went (briefly) through the roof.

In the aftermath, people in the market sought answers—to understand both what had gone wrong and the risk of it happening again. Many have turned to a Credit Suisse Group AG analyst named Zoltan Pozsar, who predicted the breakdown with almost eerie accuracy in an August research note.

Pozsar has some bad news: There’s more trouble ahead. Despite the Federal Reserve’s recent move to pump almost $500 billion into the repo market to prevent a yearend funding squeeze, deep-rooted problems remain…”

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