By Steven K. Beckner
(MaceNews) – Although monetary policy itself is highly unlikely to change next week, there’s a good chance the Federal Reserve’s policy making Federal Open Market Committee will decide to adjust the administered rates its uses to implement policy.
To maintain control of the federal funds rate, the FOMC seems likely to consider modestly raising the interest on excess reserves (IOER) rate and/or the overnight repurchase agreement (ON RRP) rate in the face of heavy demand for short-term Treasuries that is pushing short-term rates toward zero (if not below).
At its April 27-28 meeting, when it reaffirmed a zero to 25 basis point funds rate target range, the FOMC set the IOER at 0.10% and the ON RRP rate at 0.0%, while setting the per counterparty limit at $80 billion per day.
Financial institutions which can’t earn interest on excess reserves (IOER), especially money market funds, have been flooding into the Fed’s overnight repurchase agreement facility to park their cash. The New York Federal Reserve Bank, which manages the facility, accepted bids for $502.9 billion on Wednesday.
Those firms obviously want to be in secure Treasuries, but equally as obvious, the zero ON RRP rate is not very attractive. Questions have been raised about how long they will be willing to accept no yield.
From the Fed’s point of view, the ON RRP rate was intended to set a floor under the funds rate target range as it massively increases reserves through bond buying, but the Fed doesn’t want the funds rate to be pulled too far down within the 0 to 25 basis point target range. The effective rate has been averaging 0.06%.
So there have been mounting indications that the FOMC may well upwardly adjust the ON RRP rate and the IOER.
Minutes of the April 27-28 FOMC meeting disclosed that the System Open Market Account manager “noted that downward pressure on overnight rates in coming months could result in conditions that warrant consideration of a modest adjustment to administered rates….”
Subsequently, as ON RRP take-up surged ever higher, Fed officials have let it be known they are willing to adjust administered rates. A five basis point increase seems possible.
This would not represent a change in monetary policy, but it would reflect on the operational consequences of the Fed’s quantitative easing policy.
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Contact this reporter: steve@macenews.com.
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