<p>I don't know much about repo markets, but in dynamic systems in general, two things are likely to generate volatility:</p>

<ol>
<li>Large shocks of any kind, corrective or not, especially when they are reactive (and therefore delayed and possibly out of phase with underlying cycles - think about pushing a child on a swing while standing at the edge, versus standing in the middle, of the arc).</li>
<li>Reducing the inertial mass of the system.  In this case, reducing the volume of trading.</li>
</ol>

<p>You have both here. The large shock is the corrective policy (post-2008 actions like TARP), coming potentially years after the initial cause of the financial crisis. The reduced inertial mass can be partly explained by traders reacting to the disconnect between asset values and fundamentals due to actions like TARP, which was mainly about buying up worthless assets to keep banks afloat.</p>

CC BY-SA 4.0
2019-09-18T14:46:26.380Z
2019-09-18T14:46:26.380Z
heh
<p>In <a href="https://www.bloomberg.com/news/articles/2019-09-17/new-york-fed-announces-operation-to-ease-money-market-rates" rel="nofollow noreferrer">recent coverage</a> of the Fed's repo operation, I was struck by this line:</p>

<blockquote>
  <p>It also indicated Wall Street is struggling to absorb record sales of
  Treasury debt to fund a swelling U.S. budget deficit. What’s more,
  many dealers have curtailed trading because of safeguards implemented
  after the 2008 crisis, making these markets more prone to volatility.</p>
</blockquote>

<p>I do not find this so intuitive, because increasing volatility seems to be an unlikely policy objective in the context of other initiatives at the time (TARP et all.)</p>

<h2>Question</h2>

<p>I hope I did not over-simplify the matter, and I would like to understand what is the regulation the article refers to and what is the logic behind the perceived "more prone to volatility?"</p>

<macroeconomics><monetary-policy><federal-reserve>
What is it about the money market safeguards that increase volatility?
Arash Howaida
# What is it about the money market safeguards that increase volatility?

(Asked by: username_0 on 2019-09-18)

In [recent coverage](https://www.bloomberg.com/news/articles/2019-09-17/new-york-fed-announces-operation-to-ease-money-market-rates) of the Fed's repo operation, I was struck by this line:

> It also indicated Wall Street is struggling to absorb record sales of
> Treasury debt to fund a swelling U.S. budget deficit. What’s more,
> many dealers have curtailed trading because of safeguards implemented
> after the 2008 crisis, making these markets more prone to volatility.

I do not find this so intuitive, because increasing volatility seems to be an unlikely policy objective in the context of other initiatives at the time (TARP et all.)

## Question

I hope I did not over-simplify the matter, and I would like to understand what is the regulation the article refers to and what is the logic behind the perceived "more prone to volatility?"

**Tags:** macroeconomics, monetary-policy, federal-reserve

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## 1 answers

### Answer by username_1 on 2019-09-18. Score: 1 | Accepted answer

I don't know much about repo markets, but in dynamic systems in general, two things are likely to generate volatility:

1. Large shocks of any kind, corrective or not, especially when they are reactive (and therefore delayed and possibly out of phase with underlying cycles - think about pushing a child on a swing while standing at the edge, versus standing in the middle, of the arc).
2. Reducing the inertial mass of the system. In this case, reducing the volume of trading.

You have both here. The large shock is the corrective policy (post-2008 actions like TARP), coming potentially years after the initial cause of the financial crisis. The reduced inertial mass can be partly explained by traders reacting to the disconnect between asset values and fundamentals due to actions like TARP, which was mainly about buying up worthless assets to keep banks afloat.


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