Fed's Balance Sheet Decisions Impact Funding Markets and Spike Repo Rates
The Federal Reserve is figuring out how much money it needs to keep in reserves. They found that even when there were plenty of reserves, how the Fed managed its money affected funding markets like the repo market. By reducing reserves by over $950 billion from 2017 to 2019, along with new rules on bank liquidity, the Fed made it harder for big banks to manage their money, leading to higher repo rates and sudden spikes in funding markets.