Fixing repo market takes ‘trial and error’, former Atlanta Fed head says

The Fed may have to continue efforts to calm the overnight lending market into next year, former Atlanta Fed President Dennis Lockhart tells CNBC.

Turmoil in the market, which banks use to fill short-term funding requirements, resulted from a “miscalculation” in the proper level of reserves and how they would be distributed among banks, he said.

To correct that miscalculation, the Fed, through the New York Fed Open Market Desk, injects liquidity into the market through repurchase agreements, in which it buys Treasurys, agency debt, or mortgage-backed securities with the commitment that the primary dealer will repurchase that security within a defined period of time — sometimes overnight, sometimes over the course of days.

“That’s a little bit of a trial-and-error kind of thing,” he said. “And they have been injecting more bank reserves into the system to try to make sure the repo market first got through year-end, which we’ll see in the next couple of days, and secondly continues without undue volatility.”

Lockhart, like Fed Chair Jerome Powell, doesn’t consider the repo operations as a form of quantitative easing but rather part of its strategy to settle the short-term funding markets.

The recent Treasury purchases have increased the Fed’s balance sheet by ~$400B since early September.

Lockhart doesn’t expect the repo operations to be a permanent fixture.

“Once they get it right, I would expect them to back off,” he said.

Previously: Fed’s half a trillion repo intervention (Dec. 13)

https://seekingalpha.com/news/3528630-fixing-repo-market-takes-trial-and-error-former-atlanta-fed-head-says-cnbc