Worries grow over the Fed’s efforts to fix funding issues: ‘This is all likely to get much worse’

• Federal Reserve officials have been working feverishly to address issues that popped up more than a month ago in the overnight bank lending market.
• The central bank last week started a new bond-buying program that is expected to grow its balance sheet by $60 billion a month to start.
• J.P. Morgan Chase analysts, among others, worry that recent additional hiccups in overnight lending are symptoms of bigger problems that will grow worse as the year comes to a close.

Wall Street is getting worried that the Federal Reserve’s aggressive efforts to control short-term borrowing rates have run into some potholes, with more danger ahead.

The central bank has been working feverishly to address issues that popped up more than a month ago in the repo market, the overnight lending place where banks go to borrow money from each other. A cash crunch led to a spike in several rates, leading the Fed to institute programs to maintain proper liquidity levels.

While the effort has worked fairly well so far — rates rose last week, though not nearly as much as in mid-September — finance professionals fear that the market problems are not fixed and funding issues can happen again.

“The repo market has been drugged into submission by the Fed,” said Jim Bianco, head of Bianco Research. “That’s fine for a while. But what I am getting concerned about is that they’re not figuring a way to get it off the drug and get it back to normal, and that will be a problem longer term for them.”

Investors have long complained about the Fed hand-holding the market, injecting trillions of dollars in liquidity and keeping interest rates artificially low during and after the financial crisis.

This is a different situation, though.

Rather than looking to goose the economy back to health, the Fed is now using its balance sheet to make sure banks have enough reserves and an adequate amount of capital is flowing through the system to keep things...

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