The New York Federal Reserve urgently summoned Wall Street officials to address pressure in the money market.

According to the Financial Times, New York Fed President Williams convened a meeting with Wall Street dealers last week to discuss a key short-term lending facility, highlighting official concerns about tensions in the U.S. money market.

The unannounced emergency meeting took place on Wednesday, on the sidelines of the Fed's annual Treasury market meeting, according to three sources familiar with the matter. Banks, investors, and officials are currently concerned about signs of stress emerging in a hidden but crucial corner of the system.

Williams sought feedback from major dealers (mostly banks underwriting government debt) regarding the use of the Fed's Standing Repo Facility (SRF). Fed officials describe the tool as a key stress reliever that helps keep short-term borrowing costs within a target range.

The sources said that representatives from most of the 25 major dealers attended the meeting. They noted that attendees were primarily members of banks' fixed-income market teams. A New York Fed spokesperson confirmed the meeting.

"President Williams convened the New York Fed's major counterparties (major dealers) to continue communicating on the purpose of the Standing Repo Facility as a tool for implementing monetary policy and to gather feedback to ensure its effectiveness in controlling interest rates," the spokesperson said. A closely watched measure of short-term borrowing costs—the tripartite repo rate—jumped sharply above the Federal Reserve's set rate at the end of last month, but eased in the following week as investors were comforted by the Fed's promise to stop shrinking its balance sheet on December 1.

The tripartite repo rate climbed again last week, nearly 0.1 percentage point above the Fed's reserve deposit rate, although it remained below levels seen at the end of October.

Roberto Perli, head of market operations at the New York Fed, acknowledged that some borrowers were struggling to obtain repo rates close to those at the central bank's reserve deposit rate.

"The proportion of repo transactions traded above (the reserve deposit rate) has reached levels seen in late 2018 and 2019," Perli said at a New York Fed event. Repo transactions, which exchange high-quality collateral for short-term cash, provide essential lubrication to the financial system, and policymakers closely monitor the rates on these transactions.

Analysts warn that pressure is expected to return in the coming weeks. After three years of quantitative tightening, banks have very little excess cash left, and this situation will only worsen as banks shrink their balance sheets for reporting purposes as the year-end approaches.

Williams and other senior Federal Reserve officials insist that the standing repo facility will be a key tool for easing this pressure and keeping short-term interest rates within the Fed's target range. The New York Fed president stated that he believes recent use of the tool has been "effective," adding that he "fully" expects it to "continue to be used aggressively...and to curb upward pressure on money market rates."

However, the tool's use has been limited in recent weeks. While some institutions have borrowed from the Fed, the amount has not been sufficient to fully stabilize repo rates. Lenders are generally reluctant to use the tool, fearing that even if their names are only disclosed two years after the tool's use, it will still signal to the market that their institutions are under pressure.

"At the heart of repo transactions is trust," noted Thomas Simons, chief U.S. economist at Jefferies Group.

“Once any borrower is labeled as high-risk, it creates a reverse incentive for all lenders to simultaneously reduce their credit limits, even if it’s not reasonable… Once stigmatized, it’s very difficult to recover,” he said.