This week saw turmoil in an area of the financial markets that doesn’t get that much attention. On Tuesday, an overnight lending interest rate jumped to around 7% (it actually reached nearly 10% during the trading day) from its prior level of about 2.5%. These instruments, called repurchase agreements, are primarily used by large institutions for short-term funding needs. A number of factors contributed to the sharp rise in this rate including lower bank reserves as a result of the Federal Reserve Bank shrinking its balance sheet, as well as corporate tax payments being made which increases the demand for cash. This imbalance in the supply/demand for cash prompted the Federal Reserve Bank to provide liquidity to the money market space by providing its own repurchase agreement trades at target rates lower than the market rate. This is the first time the Fed has implemented this type of policy tool in over a decade. While it is likely the Fed will continue to provide the liquidity needed to support this market segment, there currently don’t appear to be signs of credit issues or stress in the financial system in general.