Thursday, September 19, 2019

Why Are Overnight Interest Rates Out of Control?

As I have detailed, overnight rates such as overnight repo rates and even the Fed funds rate have been exploding to the upside.

The rates on overnight general collateral repos over the last couple of days have exploded to as high as 10%.   This is "not supposed to happen" with so much banker money sitting on the sidelines at the Federal Reserve as excess reserves and earning, as of today, only 1.8% and just before that 2.1%.

Why aren't bankers putting the money to work in the Fed funds market and the repo market?

I am getting a lot of positive feedback for my thoughts this morning in the EPJ Daily Alert about this question, especially this paragraph that is in the ALERT:
Thus what could be occurring is that all the easy liquidity has finally been sopped up within the system and that the Fed will have to go back to its old ways. The fact that there are still plenty of excess reserves may not be important. The bankers' "hot money" that was in excess reserves may have all left excess reserves and the excess reserves that remain may be with conservative small-town bankers who are going to keep most of the reserves right where they are until the Fed sticks dynamite under their butts by say eliminating IOER completely which was the case before the Great Recession.


  1. Interesting interview on repo market issues with Zoltan Pozsar, who is known for his expertise in this area.