Behind the Fed’s Repo Spike: Why Louisiana Businesses Should Pay Attention

By Dr. Rajesh Narayanan, Hermann Moyse Jr./Louisiana Bankers Association Professor of Finance

Short-term funding markets sent an unmistakable signal at the end of October: liquidity in the U.S. financial system is tightening in ways that extend well beyond routine quarter-end adjustments. Usage of the Federal Reserve’s Standing Repo Facility surged past $50 billion—the highest since the COVID crisis—at the exact moment the Fed’s Overnight Reverse Repo facility fell to just $24 billion from more than $2 trillion only two years ago.

These are more than technical movements on Wall Street. For Louisiana’s business community—from banks and insurers to ports, petrochemical operators, manufacturers, and real estate developers—they are early warnings that the cost and availability of capital could soon become more volatile.

The SRF and ON RRP facilities anchor opposite ends of the Federal Reserve’s rate-control system. The SRF allows banks to borrow cash overnight against Treasuries or agency securities, acting as a ceiling for overnight rates. The ON RRP, in contrast, lets money market funds lend cash to the Fed, earning the ON RRP rate and creating a floor under market rates. When the ON RRP held trillions in cash, it served as a stabilizer. Money market funds could withdraw cash from the Fed and lend to private repo markets whenever rates rose, keeping liquidity flowing.

That stabilizer is now almost gone. With the ON RRP nearly depleted, there is no reservoir of capital waiting to absorb shocks. All pressure flows directly into the banking system, which is already constrained by post-2008 regulations like the Supplementary Leverage Ratio. Those rules make it expensive for large banks to expand their balance sheets even temporarily, discouraging them from moving liquidity through the system even when markets need it most.

Federal Reserve research shows that repo-rate spikes at quarter-ends have grown dramatically—25 basis points at recent period-ends compared with typical 5- to 10-point moves only a few years ago. Dealers and banks are not behaving differently; the underlying conditions are simply worse. The pattern mirrors the run-up to the September 2019 liquidity crunch, when reserves appeared plentiful but were poorly distributed and too costly to reallocate. The difference today is that the Fed no longer has a multi-trillion-dollar buffer to cushion the impact.

The result is a funding system that functions smoothly during calm periods but becomes fragile whenever Treasury issuance spikes, tax payments cluster, or month-end balance-sheet constraints tighten. Every period-end now serves as a stress test—and the readings are moving in the wrong direction. Chairman Powell’s recent decision to slow the Fed’s balance-sheet runoff will help prevent reserves from falling too low, but it won’t fix the structural problem: liquidity cannot move efficiently through the banking system because regulatory costs make it uneconomical to do so.

Louisiana’s economy is especially sensitive to such funding conditions because its dominant industries are capital-intensive and rely heavily on long-term project financing. Petrochemical expansions, port and maritime infrastructure, shipbuilding and defense manufacturing, agriculture and commodity processing, real-estate development, and municipal projects all depend on predictable short-term funding and stable borrowing spreads. When repo markets tighten, banks become more cautious about lending, liquidity premiums creep into working-capital facilities, project financing becomes more expensive, and municipal issuers face less favorable bond pricing. Even modest fluctuations in short-term rates can materially affect the economics of a refinery upgrade, a port expansion, or an industrial development.

Local banks—including Hancock Whitney, Red River Bancshares, Origin Bank, JD Bank, and community lenders across the state—depend on functioning wholesale markets to manage liquidity efficiently. When those markets strain, credit conditions in Louisiana can tighten quickly. The state doesn’t need a crisis for these effects to matter; elevated SRF usage and a depleted ON RRP already indicate that the system is operating with thinner safety margins.

Looking ahead, the most likely outcome is continued volatility. Repo markets will tighten at each period-end, SRF usage will remain elevated, and borrowing conditions will be choppier even if no outright breakdown occurs. A more adverse path would see a stress event—such as a Treasury settlement shock or unexpected liquidity drain—force the Fed back into asset purchases, demonstrating that sustained balance-sheet reduction may be impossible under the current regulatory framework. The most optimistic path would involve regulatory adjustments, such as exempting central-bank reserves from leverage ratios or reforming quarter-end reporting rules, though these changes appear politically unlikely for now.

For Louisiana companies, these developments are not abstract. Elevated SRF usage and depleted ON RRP balances serve as forward indicators of tightening credit. Businesses should anticipate greater volatility in short-term borrowing costs, time new debt issuance strategically to avoid known liquidity pinch points, maintain stronger reserve and liquidity buffers, and monitor the Fed’s weekly H.4.1 report for signs of stress. Industrial and municipal borrowers should engage lenders early, as funding windows may narrow unexpectedly.

The broader transformation underway is a structural shift in U.S. finance. Post-2008 regulations made individual banks safer but weakened the connective tissue that once allowed private markets to move liquidity seamlessly. The Federal Reserve now acts as both lender and borrower of last resort because private institutions can no longer fill that role efficiently. The pattern has repeated—2019, 2020, 2023, and now 2025: reserves appear ample until buffers thin, and then small shocks produce outsized disruptions.

Louisiana’s business community should take these signals seriously. As national liquidity cushions shrink, the stability and cost of financing our state’s growth will increasingly depend on how the Federal Reserve manages a system that has become more brittle than it appears.