NEW YORK (BLOOMBERG) – US money markets are taking a breather following last week’s volatility, but the Federal Reserve remains on alert and is examining what implications the turmoil may have for the central bank and the financial system.

Rates on repurchase agreements held steady on Monday (Sept 23) after stabilizing late last week in the wake of an unprecedented market spike. A daily Federal Reserve operation – aimed at keeping funding markets on an even keel – was undersubscribed on Monday for the first time since Tuesday, potentially suggesting some easing of pressures.

“It certainly feels calm right now, but it’s an uneasy calm until we get a sense of what the Fed does next,” said Gennadiy Goldberg, senior US rates strategist at TD Securities. “The question isn’t what happens over the next three to six days, it’s what happens over the next three to six months.”

Last week’s turmoil put attention on bank reserves, whether the Fed went too far in shrinking its securities holdings and when the central bank would begin resuming balance-sheet expansion to keep pace with the needs of a growing economy.

Officials “will continue to monitor and analyze developments closely,” New York Fed boss John Williams said Monday at a US Treasury-market conference co-hosted by the central bank branch. Policy makers “will assess the implications for the appropriate level of reserves and time to resume organic growth of the Federal Reserve’s balance sheet.”

The upheaval has also brought to the fore questions about whether the central bank should implement a standing facility to keep repo rates in check, rather than the ad hoc measures it is currently using.

Officials will probably seriously consider a standing repo facility, said former New York Fed President William Dudley, who also expects the central bank to begin buying Treasuries again.

The rate on overnight general collateral repos traded at 1.92 per cent early Monday, according to ICAP. On Sept 17, it jumped to 10 per cent, about four times greater than usual levels, as cash reserves in the banking system remained out of balance with the volume of securities on dealer balance sheets.

That spike spurred the central bank to offer as much as US$75 billion each day in overnight repo operations from last Tuesday onward. That’s a tool it hadn’t used in a decade. The take-up on the facility reached maximum levels on the final three days of last week, but edged back to US$65.8 billion on Monday.

The central bank will continue to conduct overnight repo operations for as much as US$75 billion each trading day through Oct 10 to help keep the fed funds rate within its target range. It will also conduct on Tuesday the first of three 14-day term repo operations for an aggregate amount of at least US$30 billion.

The federal funds rate meanwhile, also held steady. The rate, which the central bank aims to hold within a quarter point range, was unchanged at 1.90 per cent as of Friday, inside the bounds of the Fed’s 1.75 per cent to 2 per cent range. That stands in contrast to what happened early last week, when funding market turmoil helped to push the benchmark above the level targeted by policy makers.