Can the Fed Fix the Treasury Market by Tweaking Repo?

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Can the Fed Fix the Treasury Market by Tweaking Repo?

At its July 2021 Federal Open Market Committee meeting, it said it would create a standing repo facility (SRF) — actually, two of them, one domestic and one foreign. When people say Treasuries are highly liquid, the proof is in the repo market, where banks and other big investors swap Treasuries for cash in short-term deals that amount to collateralized loans. Repo makes the wheels of finance turn a little more easily — except when it doesn’t. In September 2019, the Fed had to flood the repo market with hundreds of billions after interest rates spiked in a sign of distress. Afterward, Fed officials postulated the idea of setting up a SRF that would give the Fed a permanent presence in the market, allowing eligible counterparties to convert certain debt securities into cash daily, as an ever-ready backstop. The turmoil of March 2020 brought the idea back to the fore.

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