The Market Events of Mid-September 2019 - FEDERAL RESERVE BANK of NEW YORK

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Economic Policy Review

The Market Events of Mid-September 2019

Volume 27, Number 2
August 2021

JEL classification: E42, E58, G14

Authors: Gara Afonso, Marco Cipriani, Adam Copeland, Anna Kovner, Gabriele La Spada, and Antoine Martin

This article studies the mid-September 2019 stress in U.S. money markets: On September 16 and 17, unsecured and secured funding rates spiked, and on September 17, the effective federal funds rate broke the ceiling of the Federal Open Market Committee (FOMC) target range. We highlight two factors that may have contributed to these events. First, reserves may have become scarce for at least some depository institutions, in the sense that these institutions’ reserve holdings may have been close to, or lower than, their desired level. Moreover, frictions in the interbank market may have prevented the efficient allocation of reserves across institutions, so that although aggregate reserves may have been higher than the sum of reserves demanded by each institution, they were still scarce given the market’s inability to reallocate reserves efficiently. Second, we provide evidence that some large domestic dealers likely experienced an increase in intermediation costs, which led them to charge higher spreads to ultimate cash borrowers. This increase was due to a temporary reduction in lending from money market mutual funds, including through the Fixed Income Clearing Corporation’s sponsored repo program.

Available only in PDF

Author Disclosure Statement(s)

Gara Afonso
The author declares that she has no relevant or material financial interests that relate to the research described in this paper.

Marco Cipriani
I declare that I have no relevant or material financial interests that relate to the research described in this paper.

Adam Copeland
I declare that I have no relevant or material financial interests that relate to the research described in this paper.

Anna Kovner
I have no relevant or material financial interests that relate to the research described in this paper.

Gabriele La Spada
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Antoine Martin
I do not have anything to disclose.

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