"New Federal Reserve News Agency": A dusty memo reveals how the Federal Reserve viewed the 2019 "money crunch" crisis

On January 10th, Friday, Eastern Time, Nick Timiraos, a senior Federal Reserve reporter known as the "New Federal Reserve Correspondent," commented on a batch of 2019 monetary policy meeting memos recently released by the Federal Reserve. He believes that among the hundreds of pages of 2019 meeting records, there is a memo that details the origins and developments of the collapse of the U.S. short-term financing market in September 2019. It was this market collapse that forced the Federal Reserve to take a series of temporary measures that year to improve the conditions of the short-term financing market, first by providing more overnight loans in the repurchase market, and later by purchasing government bonds to create new bank deposits, i.e., reserves. According to documents released on the Federal Reserve's official website, the memo mentioned by Timiraos was submitted to the Federal Open Market Committee (FOMC) three weeks after the financing market collapse, on October 8, 2019. The memo stated, "Ultimately, it turned out that the pressures in the financing market in mid-September were temporary and relatively mild." However, Timiraos believes that the conclusions drawn in the memo emphasize why the Federal Reserve took measures to rescue the market, giving a sense of ominous foreboding. The last paragraph of the memo reads: "However, it is important to recognize that the problems could be more severe. Many large financial institutions, including highly interconnected large financial market utilities, operate under the expectation that when faced with stress, they will be able to quickly convert government bonds into cash in the repurchase market. Fortunately, no such institution faced significant difficulties in mid-September, and this assumption was not put to the test." In September 2019, the U.S. repurchase market experienced a brief but severe liquidity shock, known as the "repo crisis." This occurred as the Federal Reserve ended its balance sheet reduction and concluded a tightening cycle; against the backdrop of significantly reduced dollar liquidity, the Treasury issued bonds after raising the debt ceiling; additionally, factors such as tax deadlines and RLAP regulations also "came together." On September 17, 2019, the U.S. SOFR rate surged to 5.25%, briefly spiking to 10% during the day, far exceeding the upper limit of the Federal Reserve's target rate range of 2.25% at that time. U.S. stocks corrected in response, and the VIX and OFR financial stress indices for stocks and gold briefly rose, returning to calm after the Federal Reserve quickly injected liquidity to "rescue the market." Wall Street Journal mentioned that mainstream research believes the repo crisis in September 2019 was caused by an episodic event under tight liquidity conditions. The main culprit that triggered the crisis was the scarcity of excess reserves, compounded by tax payment dates, significant Treasury bond issuance, and large banks needing to reserve substantial amounts of capital due to intraday liquidity regulatory measures. The aforementioned Federal Reserve memo referenced by Timiraos explained the unusual interest rate fluctuations in September 2019 as follows: "During the week starting September 16, the supply and demand for overnight financing seemed relatively inelastic, meaning there was no response to price signals. Therefore, the reduction in financing supply caused by tax payments and the increase in demand related to government bond settlements led to a significant rise in money market interest rates. Allocation frictions may have exacerbated this extreme volatility, hindering the rapid adjustment of funds from market participants with excess cash to those in need of financing The second-to-last paragraph of the memorandum summarizes that, The events in mid-September 2019 reminded the Federal Reserve that "the short-term funding market may also be very fragile. A series of anticipated technical factors led to a sharp rise in overnight financing prices, highlighting that the demand from borrowers is very inelastic, and funding liquidity may not be able to adjust quickly."