Via Economic Policy Journal

This is a bit technical but over the last couple of days overnight interest rates have been soaring. I mean really soaring.

I ran the below chart in the EPJ Daily Alert yesterday. It shows the change in rates on a day to day basis over the last 10 years. That spike in the far right corner is what has been occurring over the last couple of days.

The rates on overnight general collateral repos over the last couple of days have exploded to as high as 10%. This is a serious spike given that the target Fed funds rate was 2.0% to 2.25%

Over the last couple of days, the Fed has been battling the spike in overnight rates by pumping money into the system beyond their normal operations. This morning they pumped $75 billion in additional overnight funds into the system.

They have just announced they are going to again pump up to another $75 billion tomorrow morning.

This is the Fed statement:

Statement Regarding Repurchase OperationSeptember 18, 2019 

In accordance with the FOMC Directive issued September 18, 2019, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct an overnight repurchase agreement (repo) operation from 8:15 AM ET to 8:30 AM ET tomorrow, Thursday, September 19, 2019, in order to help maintain the federal funds rate within the target range of 1-3/4 to 2 percent.

This repo operation will be conducted with Primary Dealers for up to an aggregate amount of $75 billion. Securities eligible as collateral in the repo include Treasury, agency debt, and agency mortgage-backed securities. Primary Dealers will be permitted to submit up to two propositions per security type. There will be a limit of $10 billion per proposition submitted in this operation. Propositions will be awarded based on their attractiveness relative to a benchmark rate for each collateral type, and are subject to a minimum bid rate of 1.80 percent.

Yes that is correct, the Fed has to get the rate even lower tomorrow because of today’s cut in rates by the FOMC.

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If the pressure on short term rates doesn’t ease, the Fed is going to have to make the overnight money pump much more permanent.

As I said today in the ALERT:

Buckle your seat belt and make sure you have your price inflation protection suit on. We Work might even be able to get funded with this large a money pump.

UPDATE:

Drudge is highlighting the money pump:

RW