While the spike in repo and other short-term rates can be attributed to a confluence of events that resulted in a large swing in the US Treasury’s cash balances, the extent of the move suggests either that reserves may be closer to their “terminal level” than previously thought, and/or that intermediation is currently constrained. The stress could persist in the near term without Fed intervention, but is not a “systemic risk” issue in our view.
Our projections for reserve balances and recent price action suggest that reserve injection on the order of $100-$150bn may be necessary over the next few weeks to keep the policy rate within the target range. While we expect a pick-up in reserve balances in late October/early November, this pick-up is likely to prove temporary. Therefore, rather than engage in temporary OMOs over long periods, the Fed may choose to expand its balance sheet by an amount offsetting non-reserve liability growth as early as October, when it announces its next round of Treasury reinvestment purchases.
- Goldman Sachs Research
