Fed’s Williams Sees Need for More Reserves After Repo Spike

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New York Federal Reserve President John Williams said bank reserves will probably need to be higher in the future to limit the risk of money markets repeating their recent turmoil, the New York Times reported, citing an interview.

“Despite there being a lot of reserves in the system, they weren’t moving around. They’re lumpy’’ Williams told the newspaper. “We are seeing that liquidity doesn’t move around as easily, in these situations, which means that if we want interest rates to stay kind of on their own in a narrow range, that we have to make sure we have that amount of reserves to support that.”

The New York Fed was forced to intervene in markets for the first time in a decade this month after repo rates spiked to as high as 10%, forcing up the effective federal funds rate above the Fed’s target range.

Williams said there is a possibility the Fed will activate a new tool, called a standing overnight repo facility. It would amount to a standing offer to lend a certain amount of cash to repo borrowers every day.

In a separate interview with the Wall Street Journal, Williams denied that the recent ousting of Simon Potter as head of the institution’s markets desk had limited the New York Fed’s response.

‘Fed at its Best’

The institution followed a “consistent approach of assessment, coming up very quickly with an appropriate plan, and executing that,” Williams said. “This is really the Fed at its best.”

His colleague Charles Evans, who leads the Chicago Fed, said in an interview on CNBC on Monday that the repo measures instituted by his colleague Williams constitute a “strong program” with a “well-designed plan.”

“Term repos have been extremely helpful,” Evans said. “The most important thing is providing ample reserves,” he noted, adding that “We’re going to continue to look at that.”

Evans said that officials want to achieve a normal level of volatility.

“We’re never going to have completely still rates,” he said.

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