In September, a disruption in the market in which banks and others lend and borrow for very short periods of time, the repo market, led to a sharp spike in short-term interest rates and prompted the Federal Reserve to inject tens of billions of dollars of reserves into the markets. The episode has given rise to questions about the Fed’s new operating framework for influencing interest rates and about possible unintended consequences of regulations imposed after the global financial crisis to make sure banks have enough liquidity to handle another crisis. JP Morgan Chase CEO Jamie Dimon suggests that resolution-and-recovery liquidity stress tests may need to be re-calibrated. U.S. Treasury Secretary Steve Mnuchin says it may make sense for regulators to examine intra-day liquidity rules. Senator Elizabeth Warren (D-Mass.) says she suspects that banks are using the episode to ease liquidity requirements they have long disliked.
On Thursday, December 5, the Hutchins Center on Fiscal and Monetary Policy at Brookings sought to answer questions on what happened in the repo markets in September and why — and what, if anything, the Fed or other regulators should do about it.