How can reserves be too low when there are $1.4 T in excess reserves? How can repo rates spike to nearly 10% when the interest earned on those $1.4 T reserves only yields 1.80%? edit: more questions. As I understand it, the "repo market" is broader than only banks. Why is it that the Fed performing repo operations will alleviate the liquidity issue in the repo market, unless it is some such bank borrowing in the repo…
The rate spiking is indeed reflective of someone needing collateral quickly and being willing to pay up for it.
Now the fact that it spiked doesn’t mean Armageddon, just check out Chinese interbank stats to get a sense of how much they can move.
That being said looks like a narrative has formed that it must mean reserves are “too low” and so, I guess we should print more.
Another perspective is we had a decent amount of monetary tightening, and tightening are designed to reduce liquidity, especially on the front end.
This is a sign that, that tightening, combined with regulatory pressure on banks to get out of this market, have indeed reduced liquidity.
Now, no one really wants to make levered entities go under because randomly repo liqidity dries up, so the answer is clearly to just print more money.
What’s being missed though is that this illiquidity is not a bug, it’s a lagged feature of monetary policy decisions from 2014-2018.