An obscure but very large part of the financial markets caused a stir in late September. Lending rates spiked in the repurchase (repo) markets as institutions sought short-term liquidity. The rate for general collateral repurchase agreements reached a record high (light blue line) versus the overnight bank funding rate but quickly retreated as the Federal Reserve acted to calm the markets by injecting liquidity (black dots). If left unchecked, the escalation in rates could have done damage to the broader economy by hiking borrowing costs for companies and consumers. Several theories about what caused the liquidity crunch have been floated: large new issuance settlements on already bloated bank balance sheets, a tax payment date forcing entities to source temporary liquidity or, perhaps it was the Federal Reserve’s smaller balance sheet leading to less liquidity in the markets. Regardless, the market consensus is that this dislocation is not a liquidity crisis. Ultimately, the Fed may again have to grow its $3.8 trillion balance sheet through debt purchases that create fresh reserves. Chairman Jerome Powell said the Fed took appropriate actions to resolve the near-term funding pressures, adding that they have the necessary tools, and will use them as needed.
 The overnight bank funding rate is calculated by the New York Fed from daily transaction data including federal funds and certain Eurodollar and domestic deposit transactions maturing the following business day. It is a measure of wholesale, unsecured, overnight bank funding costs. The broad general collateral rate is a measure of rates on overnight Treasury general collateral repurchase agreement (repo) transactions where securities (U.S. treasuries and agency debentures, MBS and CMO) are pledged as collateral but not identified until after other terms of the trade are agreed.