BALTIMORE (Reuters) – Having successfully avoided a liquidity crunch in money markets at the end of the year, Federal Reserve officials can now focus on finding a long-term solution for stabilizing short-term interest rates, Richmond Federal Reserve president Thomas Barkin said on Friday.
Interest rates in the overnight lending markets for cash remained subdued on Dec. 31, which was expected to be a tough day for liquidity as banks cut back their lending for regulatory reasons. Financial firms took up only a small amount of the $150 billion the Fed offered up in the market for repurchase agreements, or repo, on the last day of the year.
Barkin said officials will remain focused on the near term- task of providing enough liquidity on April 15, when the federal tax deadline could lead to a potential cash crunch in short-term borrowing markets.
But he said policymakers are also concentrated on finding a long-term fix.
“I think it’s worth asking the question of what else could we do that would help create liquidity in the repo market and therefore the fed funds market,” Barkin said in a conversation with reporters after delivering remarks to the Maryland Bankers Association in Baltimore.
Possible solutions could include creating a standing repo facility, adjusting liquidity regulations and setting restrictions on other programs that can affect reserves, such as the foreign repo pool, he said.
“All those are legitimate long term conversations to have now that we’re through the short term,” Barkin said.
(Reporting by Jonnelle Marte; Editing by Chizu Nomiyama)