Earlier this week, the overnight repo market spiked above 9%. Even the effective funds rate spiked slightly above the upper target. There are a lot of theories about why this happened. The truth is no one will ever know what happened. We do not have enough information on these operations. The important point is the fed had $83 billion in total bids submitted for yesterday morning’s operation which was over the size of the $75 billion operation. In other words, they are going to print money as needed.
Historically, repos used to be a regular part of Fed operations prior to 2008. After Bernanke created a massive amount of money in 2008, these operations seized to be part of fed operations since the banks were sitting on 2.4 trillion dollars of excess reserves. Excess reserves now stand at 1.3 trillion dollars. This is about half of what it was 5 years ago. Even though excess reserves stands at 1.3 trillion dollars, we do not know which banks are holding these excess reserves. It is possible the amount of excess reserves is becoming irrelevant. Maybe they are being held by conservative banks and not really reflective of the market as a whole. Or this could just be a minor technical glitch.
Bottom line- This seems to be a temporary dislocation in the overnight interbank lending market and not a sign of stress.