The drama kicked off in New York this week when John Williams, the head of the New York Fed, pulled top Wall Street dealers into a sudden, closed‑door meeting to talk about rising tensions inside a key short‑term lending tool.
The meeting happened on Wednesday on the sidelines of the central bank’s Treasury market conference, according to three people who were there, and it showed how worried officials are about strange moves inside the repo market.
The Fed confirmed the meeting and said straight up that Williams wanted clear feedback from the banks that handle government debt. He pushed them to explain how they’re using the standing repo facility, a tool that is supposed to help the Fed keep short‑term borrowing costs inside its target range.
A spokesperson said Williams met the primary dealers to make sure the tool still works for rate control. Most of the 25 primary dealers sent fixed‑income team members, who said stress signals are rising at the worst possible time.
Banks, investors, and officials are watching the same corner of the system because things have started moving in ways that look too familiar. The tri‑party repo rate, a key gauge of short‑term borrowing, shot well above the level set by the Fed late last month. It calmed down the following week only after investors heard that the central bank will stop shrinking its balance sheet on December 1.
But this week, that rate started rising again, sitting almost 0.1 percentage points above the Fed’s rate on reserve balances. Even though the rate is still lower than what traders saw in late October, the pattern is making desks nervous.
Williams presses dealers as rates move away from Fed target
Roberto Perli, who runs market operations at the New York Fed, said at an event this week that some borrowers are struggling to find repo rates that sit close to the interest paid on reserves parked at the central bank.
He explained that the share of transactions happening above the reserve‑rate level has climbed to points last seen in 2018 and 2019.
Repo deals trade high‑quality collateral for cash for very short periods, and they are a core part of how the system gets its daily liquidity. Traders watch those rates like hawks. Analysts have warned that pressure will likely get worse heading into year‑end.
After three years of quantitative tightening, banks do not have much spare cash left. That worsens as December nears, because banks shrink their balance sheets for reporting reasons.
Williams and other senior officials at the Fed have said the standing repo facility must play a big role in holding short‑term rates inside the Fed’s target band. Williams said earlier this week he thinks recent use of the tool has been “effective,” and he said he expects it will “continue to be actively used” as money‑market stress builds.
But the reality is that the use of the tool has been weak. A few firms have borrowed from the facility, but not in numbers strong enough to bring repo rates back toward the Fed’s target.
Lenders are hesitant. They worry that tapping the tool will make them look desperate, even though the names of borrowers are released only two years later.
That fear feeds the system’s biggest problem: trust. Thomas Simons, chief U.S. economist at Jefferies, said “repo is all about trust,” and warned that if a borrower looks even a little risky, lenders may pull back all at once.
He said that once a firm gets that label, “it’s hard to recover.” His point lands at a time when stress is rising and cash is tight.
Dealers say the issue is turning into a loop: stress pushes rates up, higher rates push firms toward the repo tool, stigma pulls them away, and the Fed is left trying to keep everything inside its range with a tool that many are scared to touch.
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