How a liquidity crunch in the short-term lending markets sent interest rates soaring. Why this is a huge blunder on the part of the Federal Reserve, and what it means for us as individual investors.
Topics covered in this episode include:
- What are repurchase agreements and how are they used to finance U.S Treasuries.
- How outflows from money market funds and hoarding by banks led to a liquidity crunch that caused repo rates to spike to 10%.
- Why banks are hoarding reserves held at the central bank even though there are over $1.4 trillion of them, up from $20 billion in 2007.
- How quantitive easing increases reserves and quantitative tightening reduces reserves.
- How the Federal Reserve was able to stop the disruption in the repo market, even though the central bank was caught off guard and could have prevented it.
- How individual investors can protect themselves from unintended consequences arising from the unconventional policies and experiments being conducted by the Federal Reserve and other central banks.
Thanks to The Great Courses Plus
for sponsoring the episode.
For show notes and more information on this episode click here
- [0:20] The Fed loses control over policy rates, and repo interest rates soar.
- [2:19] What is a repurchase agreement (repo)?
- [5:02] Why the big players in repos pulled back on Sept. 16th.
- [8:38] Banks need more liquidity because of regulations.
- [12:53] Why reserves have fallen so low.
- [17:43] How does the reserve balance get reduced?
- [19:23] The Fed may have shrunk it’s balance too far.
- [21:36] What can be done about the reserve shortage?
- [24:17] What can we learn from the repo rate raise?