Former Fed Official Kocherlakota Signals Concern for Repo Market

(Bloomberg) --

Former Federal Reserve policy maker Narayana Kocherlakota says that while the recent disruptions in U.S. money markets won’t undermine the central bank’s ability to achieve its goals, they underscore that something is wrong with the plumbing of the financial system.

In an opinion piece for Bloomberg published Wednesday, the former Minneapolis Fed president said the “deeper issue” is that since the financial crisis, regulatory reforms “have constrained the ability of flush banks to lend, and of tight banks to borrow.” While the central bank can temporarily inject cash into the markets to control short-term rates, Kocherlakota said it’s hard to understand how funding markets will respond to future shocks.

The Fed has been injecting liquidity into the system since Sept. 17, when the rate on overnight general collateral repurchase agreements jumped to 10%, about four times greater than usual levels, as cash reserves were out of balance with the volume of securities on dealer balance sheets. The New York Fed conducted another overnight repo operation on Wednesday morning, taking the maximum amount of $75 billion, with dealers submitting about $92 billion of assets.

Related Story: Caution Reigns in Repo as Market Suggests Bumpy End to Quarter

Though overnight rates have retreated from record levels, general collateral repo has climbed back above 2% and was trading around 2.09% Wednesday, ICAP data show.

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

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