Powell signals Fed open to adjusting regulations to keep money markets stable

Jonnelle Marte

Dec 11 (Reuters) - Federal Reserve officials are looking into whether supervisory and regulatory constraints contributed to the recent rupture in money markets, Fed Chair Jerome Powell said on Wednesday, adding that officials were open to adjusting rules to help minimize volatility in the federal funds rate.

The U.S. central bank has been intervening in money markets since mid-September, when borrowing rates in the market for repurchase agreements, or repos, surged to 10%.

The jump in borrowing rates temporarily pushed the federal funds rate above the Fed's target range at the time. The volatility also came as reserves were well above what banks reported as their lowest comfortable level of reserves, Powell said.

That led officials to look into the factors that kept some large banks with high levels of reserves from lending their cash, Powell said.

"There have been a number of supervisory and regulatory issues raised. We're looking carefully at those," Powell said during a press conference after Wednesday's meeting of Fed policymakers.

"We're open to ideas for modifying supervisory and regulatory practices in ways that don't undermine safety and soundness and a number of ideas are under examination there," he said.

Powell's remarks came a week after Federal Reserve Vice Chair Randal Quarles said the central bank was reviewing its supervisory practices in response to the crunch in the repo market. In testimony before the House of Representatives Financial Services Committee, Quarles said the liquidity stress tests that Fed supervisors run on large banks could have caused lenders to prefer to hold reserves as opposed to high quality liquid assets such as Treasury bonds.

"They were probably not the decisive contributors, but they were contributors, and I think we need to examine them," Quarles said.

When the repo market volatility began this fall, some big banks seized on the incident as an opportunity to call on the Fed to ease liquidity requirements.

Earlier on Wednesday, JPMorgan Chase Chief Executive Jamie Dimon once again pushed the Fed to reconsider its liquidity rules, arguing the issues in the repo market could spill over to other financial markets in a weaker economy.

"They should look at recalibrating all the rules and regulations that do affect the liquidity in the market. This is a minor one, the repo market," Dimon said. "But it would affect other markets, and it could, that wouldn't be so minor."

The Fed is pumping billions of dollars of cash into short-term lending markets by offering daily and term operations in the repo market. The bank is also purchasing $60 billion a month in Treasury bills to increase its balance sheet and raise the level of reserves in the banking system.

Powell, in Wednesday's comments, said the Fed's efforts have been successful and reiterated that officials are willing to do what it takes to keep markets calm through year end.

"We think the pressures appear manageable and we stand ready to adjust the details of our operations as necessary to keep the federal funds rate in the target range," he said. (Reporting by Jonnelle Marte; Editing by Tom Brown)