By Jonnelle Marte
(Reuters) - The Federal Reserve's efforts to boost reserves in the banking system helped to calm markets and make the much anticipated year-end period a non-event, and officials are still debating the details of a potential standing repo facility, a top Fed official said on Wednesday.
Philadelphia Federal Reserve Bank President Patrick Harker said one of the main lessons learned from the September rupture in money markets, when short-term borrowing costs spiked up to 10%, was that the amount of reserves needed by banks was larger than the Fed's estimates. The incident also made it clear that banks are "reluctant" to the Fed's discount window to borrow cash when needed, Harker said in remarks prepared for delivery in New York at an event on economic policy.
"Central to this event is the question of why the liquidity did not flow smoothly to where it was needed most," he said. "Are some of the market's pipes rusty? Clogged? Are more needed? Has regulation inadvertently contributed to some erosion or blockage?"
The Fed calmed markets by injecting billions of dollars of temporary liquidity into the market for repurchase agreements, or repo. On Tuesday, the central bank said it will continue the operations until at least mid-February, longer than initially expected. The Fed will also continue purchasing $60 billion a month in short-term Treasury bills to grow the level of reserves.
Harker said officials are still mulling over potential tools to help manage liquidity. He said the conversations exploring a potential standing repo facility, which would let banks trade securities such as Treasuries for cash, are "still very much in the discourse, rather than the decision, phase."
Fed officials agreed unanimously to leave interest rates unchanged at the December policy meeting after lowering borrowing costs three times last year.
Harker, who becomes a voting member in policy decisions this year as part of the Fed's rotation, previously said he did not support the September and October rate cuts.