Sep 26, 2019

Fed's repo market troubles suggest something "very wrong" with the financial system

Illustration: Rebecca Zisser/Axios

Despite tens of billions of dollars of cash infusions every day for more than a week, things are getting worse, not better, in the systemically important repo market that banks use to access cash.

Driving the news: It's prompted the New York Fed to again increase the size of overnight cash loans offered to $100 billion a day, and to double the size of a 2-week offering to $60 billion.

Why it matters: The dysfunctional market signals "that something’s very wrong with the financial system," former Minneapolis Fed president Narayana Kocherlakota wrote in an op-ed for Bloomberg.

What's happening: The market is designed to operate so that banks with collateral like U.S. Treasury bonds can quickly trade those for cash, but a decreasing level of liquidity has banks "scraping the bottom" and relying on the Fed's infusions to conduct everyday business, strategists tell Axios.

  • The clearest evidence of this market stress was Wednesday when the Fed supplied $75 billion of cash and got $92 billion of offers, showing an extreme lack of available dollars.

What we're hearing: "Nobody knows right now whether this will blow over or not," Danielle DiMartino Booth, CEO of Quill Intelligence and a former adviser to the Dallas Fed, tells Axios.

Threat level: The injections are prompting suspicion the Fed is instituting a clandestine new phase of quantitative easing to boost asset prices and help stimulate the economy, but that's not the case, according to market strategists.

The big picture: The unexpectedly large budget deficits of the Trump administration, combined with the Fed's attempt to unwind its previously $5 trillion balance sheet, have caused a backup in the market. The Fed is now having to supply cash to fix the plumbing in a process that looks eerily similar to QE.

  • Strategists who have spoken with Fed officials are expecting the central bank to unveil a $300 billion–$500 billion standing credit line to the market at its meeting next month, in order to provide consistent liquidity and keep the market functioning.

The bottom line: "What the Fed is trying to do is make sure we don’t have episodes like this in the future," said Ian Lyngen, the head U.S. rates strategist at BMO Capital Markets, a primary dealer that does business directly with the Fed.

  • If the market dysfunction continues, "that’s going to weigh on corporate profitability, the cost of money becomes more expensive, and then it has real economic consequences," Lyngen tells Axios.

Go deeper

The wreckage of summer

Illustration: Sarah Grillo/Axios

We usually think of Memorial Day as the start of the summer, with all of the fun and relaxation that goes with it — but this one is just going to remind us of all of the plans that have been ruined by the coronavirus.

Why it matters: If you thought it was stressful to be locked down during the spring, just wait until everyone realizes that all the traditional summer activities we've been looking forward to are largely off-limits this year.

Coronavirus dashboard

Illustration: Aïda Amer/Axios

  1. Global: Total confirmed cases as of 3 a.m. ET: 5,410,228 — Total deaths: 345,105 — Total recoveries — 2,169,005Map.
  2. U.S.: Total confirmed cases as of 3 a.m. ET: 1,643,499 — Total deaths: 97,722 — Total recoveries: 366,736 — Total tested: 14,163,915Map.
  3. World: White House announces travel restrictions on Brazil, coronavirus hotspot in Southern Hemisphere Over 100 coronavirus cases in Germany tied to single day of church services — Boris Johnson backs top aide amid reports that he broke U.K. lockdown while exhibiting symptoms.
  4. Public health: Officials are urging Americans to wear masks headed into Memorial Day weekend Report finds "little evidence" coronavirus under control in most statesHurricanes, wildfires, the flu could strain COVID-19 response
  5. Economy: White House economic adviser Kevin Hassett says it's possible the unemployment rate could still be in double digits by November's election — Public employees brace for layoffs.
  6. Federal government: Trump attacks a Columbia University study that suggests earlier lockdown could have saved 36,000 American lives.
  7. What should I do? Hydroxychloroquine questions answeredTraveling, asthma, dishes, disinfectants and being contagiousMasks, lending books and self-isolatingExercise, laundry, what counts as soap — Pets, moving and personal healthAnswers about the virus from Axios expertsWhat to know about social distancingHow to minimize your risk.
  8. Other resources: CDC on how to avoid the virus, what to do if you get it, the right mask to wear.

Subscribe to Mike Allen's Axios AM to follow our coronavirus coverage each morning from your inbox.

Updated 5 hours ago - Politics & Policy

U.S. coronavirus updates

Data: The Center for Systems Science and Engineering at Johns Hopkins; Map: Andrew Witherspoon/Axios. This graphic includes "probable deaths" that New York City began reporting on April 14.

The CDC is warning of potentially "aggressive rodent behavior" amid a rise in reports of rat activity in several areas, as the animals search further for food while Americans stay home more during the coronavirus pandemic.

By the numbers: More than 97,700 people have died from COVID-19 and over 1.6 million have tested positive in the U.S. Over 366,700 Americans have recovered and more than 14.1 million tests have been conducted.