Warren Writes Mnuchin on Repo
We learned from RBC's Mike Cloherty about a letter from Senator Elizabeth Warren to Treasury Secretary Steve Mnuchin on the Sept. 16 repo spike. It says, "I write to you in your capacity as Chair of the Financial Stability Oversight Council (FSOC) to request information regarding the recent volatility in the short-term lending market, the 'emergency measure' taken by the Federal Reserve Bank of New York (New York Fed) in response to this volatility, and the two extensions announced in response to these efforts in recent weeks. While the Federal Reserve has taken the necessary action to ensure that markets continue to function, I am alarmed that it has been required to engage in money market interventions that have not been used since the 2008 financial crisis, and I write to obtain your understanding of the underlying causes of this fluctuation in the market and how you plan to mitigate them. During the week of September 16, 2019, borrowing rates for overnight repurchase agreements (repo rates), paid by banks when they borrow money to meet their short-term obligations, jumped from around two percent to ten percent. This sharp and abrupt spike in the repo rate caught market participants off guard, and, while it may have only affected overnight borrowers in the short term, 'if the strains last long enough it can affect the rates other businesses and consumers pay.'" It adds, "I do not question the actions of the New York Fed, but I write to seek clarity on why they were necessary, and the implications of the cause of the spikes. Some have suggested that the rate spike is related to the reduction of cash in the financial system due to quarterly tax payments deadlines coupled with Treasury auction settlements. However, these tax payments and settlements were not a surprise, and such a cash shortage would have been anticipated well before the rate spike occurred."
