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Fed signals readiness to wield power over short-term rates

Chairman says it might be appropriate adjust the interest on excess reserves rate.
Image: Erin Scott, Bloomberg

Federal Reserve Chairman Jerome Powell stands ready to pull some of the central bank’s policy levers in between regularly scheduled meetings, if that’s what it takes to keep short-term interest rates under control.

He noted recent downward pressure on rates during the Federal Open Market Committee’s March 16-17 meeting, according to minutes released Wednesday, and said it might be appropriate adjust the interest on excess reserves rate (known as IOER), the amount the Fed pays on its facility for overnight reverse repurchase agreements or both. Action could come at a regular meeting or between them to keep the fed funds rate, the central bank’s main policy benchmark, “well within” 0% to 0.25%, he said.

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Repo and Treasury bill rates have been flirting with zero – and even trading below sometimes – since the beginning of the year as reserve balances at the central bank swell. Market participants have told the Fed that a rapid expansion in reserves could keep driving money-market rates lower, with the earliest and most pronounced moves in the overnight secured funding markets.

“The Fed has no qualms about helping the front-end when it’s necessary, but at the moment it seems that things would have to get worse before the Fed steps in,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities.


Padhraic Garvey, head of global debt and rates strategy at ING Groep NV, expects that moment could come sooner with a 10 basis point hike on IOER. “It would be purely a technical thing, to coax liquidity into that bucket, and in so doing to help frame where surrounding alternatives should trade, including the likes of SOFR,” he wrote in a client note.

Traders aren’t waiting either. They’re selling futures tied to the Fed Funds rate that would benefit from such a move after the FOMC minutes hinted at the appropriateness of implementing adjustments to administered rates.

The Fed took its first steps to support short-term rates last month when it directed the Open Markets Desk at the New York Fed to increase the daily counterparty limit on its overnight reverse repo facility to $80 billion per day from $30 billion, the first adjustment since 2014.

On Wednesday, 15 participants tapped the facility for $35 billion, the most since March 31.

© 2021 Bloomberg L.P.

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