U.S. Markets

Fed meeting minutes shed more light on repo chaos

(Reuters) - Meeting minutes released by the Federal Reserve on Wednesday shed light on how recent volatility in money markets caught officials’ attention and pushed the central bank into action.

Here is a rough timeline of events, as laid out by the meeting notes:

Money markets were quiet over the summer, but trouble appeared just before the start of the September policy meeting.

There was a spike in demand for cash, apparently caused by large corporate tax payments and Treasury settlements. A liquidity crunch quickly rippled across money markets.

Uncertainty over how much cash would be needed caused some money market mutual funds to build up a cushion of reserves instead of lending. Rates on Treasury repurchase agreements, or repo, rose to over 5% on Sept. 16 and above 8% a day later.

The surge in repo rates, which are viewed as a key measure of liquidity, began to affect other lending markets. Federal Home Loan Banks, which account for the majority of lending in the federal funds market, scaled back to put more funding into the repo market.

That shift pushed the effective federal funds rate to the top of the Fed’s target range on Sept. 16, spurring the Fed to act the following morning.

The New York Fed intervened on Sept. 17, injecting up to $75 billion of cash into overnight lending markets. The move worked, bringing rates down to about 2.5%.

The turbulence in money markets offered potential answers to some questions Fed officials had been asking themselves. When some firms had hesitated to lend, it suggested to the Fed that those banks may have underestimated the level of reserves they need.

But committee members then agreed the pressure in short-term lending markets meant it was time to evaluate whether there were enough reserves in the banking system.

The level of reserves declined as the central bank trimmed its balance sheet, and policymakers knew they might one day need to expand it to keep short-term rates stable.

Fed Chair Jerome Powell answered any questions about the timing of such a move by announcing this week that the time to expand the balance sheet “is now upon us.”

Powell also reiterated one point of clarification Fed members brought up during the last meeting: Any asset purchases made to stabilize cash markets should not be confused with quantitative easing.

Reporting by Jonnelle Marte in New York; Editing by Tom Brown