In September 2019, the interest rate for the overnight money market — a short-term lending market where banks borrow cash from each other to meet reserve requirements at the end of a business day — surged to 10 percent.
Banks weren’t willing to lend out capital for the Federal Reserve’s target interest rate of 2 percent. The Fed responded to the cash crunch[1] by financing these so-called repurchasing agreements (repos, for short) directly. It offered the 2 percent interest on these short-term loans (they’re usually paid back in days or weeks) to bring the interest rate down and pump cash into a strapped lending market. It has been offering these overnight loans on a daily basis ever since.
When the Federal Reserve began offering these daily agreements in late September 2019 it was the first time it has intervened in repo markets since the Great Recession. The United States’ central bank has funneled roughly $500 billion into the repo market since then in what was originally pitched as temporary operations that would end on October 10, 2019 — but the daily repo bids are still coming. Currently, there is $229 billion in outstanding[2] repos on the Fed’s balance sheet.
The Fed is even considering lending directly to smaller financial institutions and hedge funds through the repo market — an unprecedented move in the history of the century-old institution.
With the Fed gripping the reins of this obscure but essential sector of the U.S. financial realm for the first time since the 2007–2008 financial crisis, should the average American be anxious about the state of the U.S. financial market?
“Leverage Is Necessary”
“The key question is ... should the average American be worried? If [the Fed] keep[s] going, then they should be worried, but if
