It seems that the Federal Reserve has been injecting money into the market through overnight repurchase agreements all year, but don’t misunderstand—this isn’t a move toward a large-scale quantitative easing. Essentially, it’s about paying the bill for the pandemic-related QT while ensuring that the federal funds rate stays within the set target range. What’s the real concern? It’s the fear of a repeat of the September 2019 REPO crisis.

Speaking of that crisis, what was the situation back then? Repo market liquidity suddenly tightened, and overnight repo rates skyrocketed. SOFR jumped from 2.43% to 5.25%, with intraday highs even reaching 10%. Meanwhile, the federal funds target range was only 2.00%-2.25%, which was quite a discrepancy. Even worse, spillover effects began to appear: pressure from the repo market transmitted to the federal funds market, pushing the effective federal funds rate (EFFR) up to 2.30%, directly breaking through the upper limit of the target range.

The Fed’s two main tools are controlling inflation and promoting employment. Injecting liquidity through overnight repos is fundamentally about preventing short-term liquidity crises, not about launching a new round of QE.