Fed Intervention in the Repo Market

There are $1.4 T in excess reserves deposited at the Fed currently. The Fed pays interest on those reserves at 1.80%.

Banks have to maintain at least a certain amount of required reserves with the Fed. When they do not have these reserves, they can borrow them from banks that have excess reserves. (They can also borrow them from the Fed via the discount window, but generally don't, due to stigma.)

This borrowing is usually done via the repo market. In a repo, the borrower pledges some collateral--usually government debt, and agrees to repurchase the asset e.g. the following day. To incentivize a lender to enter such an agreement, the interest rate on such a deal must be greater than what the lender could receive from the Fed for IOER.

Per media reports, interest rates in the repo market at one point spiked as high as 10%. The media has cited a "dollar shortage" caused by taxes being owed and institutions having purchased large amounts of US federal debt recently, both of which decrease central bank reserves. But, there are still $1.4 T in excess reserves. And we're talking about a very safe loan: collateralized by sovereign debt (usually) and overnight. So, if someone wanted to borrow them at a "reasonable" rate, they should have been able, assuming they had the collateral.

Assuming they had the collateral. The attack on the Saudi oil facilities, and the 15% spike in oil prices that resulted very well could have been a black swan event that has caused what we're now seeing. The timing certainly is coincidental. Note also that the Fed knew that Lehman was insolvent about a month before it was publicly reported.

Meanwhile, the Fed has announced it's going to perform repo operations for a fourth time this week tomorrow morning.