In this week’s Off The Cuff podcast, Chris and Wolf Richter discuss:
- What is the repo rate?
- Why did the rate suddenly skyrocket?
- Why a liquidity crisis is so dangerous
- Will the Fed really start up QE again?
Something completely unexpected happened this week. Banks started running out of cash reserves. As a result, the cost for them to borrow money overnight — the repo rate — suddenly skyrocketed, taking the banking system and the Federal Reserve by surprise.
While the situation appears under control for now, it is not a good sign nor a healthy one for the financial system. As Wolf explains:
This was something the Fed used to do all the time. And then it started QE and its interest rate policy and the banks started building these massive reserves and the Fed no longer needed to do these repos. So it stopped doing them.
And then it started manipulating the full-terms rates via the interest on excess reserves, assuming that banks would be smart enough to do the right thing and keep the effective Federal Funds Rate in the range where the Fed wanted it.
That mechanism broke down this week.
And so for the first time since 2008, that mechanism no longer functions the way it did. You described it very well – the plumbing just broke. And so now the Fed regressed to a technique that it has used before QE, which are these repos.
So the Fed is manipulating the markets, but some
by pinecarr 
