If repo agreement rates climb back above—or even just at the upper bound of—the effective federal funds rate target range and persist for several weeks, policymakers may need to adjust, according to Barclays strategist Samuel Earl in a report.

Earl noted that the repo market is a "key driver" of federal funds rate movements, and officials should be concerned if repo rates remain at or exceed the upper limit of the range. This suggests the Federal Reserve may ultimately need to increase reserves through additional repo lending or direct Treasury bill purchases.

Earl pointed out potential resistance from FOMC members, including Governor Michelle Bowman, who holds a hawkish stance on balance sheet issues. They may be cautious about maintaining a large asset portfolio or "bailing out the repo market" amid what is perceived as only moderate stress.

This is particularly relevant because the federal funds rate—the actual policy target—has remained near the midpoint of its target range. Moreover, buying short-term Treasuries now due to issuance-driven volatility could risk perceptions of fiscal dominance, which the Fed aims to avoid.

"Strengthening the Standing Repo Facility should be a priority," Earl wrote, with clearing being a critical area for improvement. The Fed could also lower the facility’s rate to make it more attractive relative to the target range. Additionally, offering term repos—either temporary or standing—could ease month- and year-end pressures.

While the Fed may not need to expand its balance sheet until next year, it could begin reserve management purchases immediately and "act very quickly and on a sizable scale."

"If conditions deteriorate significantly, the Fed might deploy both repos and direct Treasury bill purchases to alleviate pressure," Earl concluded.