The effective fed funds rate fell to 0.04% Thursday from 0.05% the day before, according to New York Fed data released Friday. That’s in line with the low reached in 2011. The drop also increases the chance that the central bank adjusts some of its tools — the interest on excess reserves rate could be one — to steer the benchmark closer to the middle of its target range. That band is currently 0%-0.25%.
The decline, which is taking place even as an influx of Treasury bill issuance could potentially be exerting upward pressure on front-end rates, comes at a time when some of the recent stresses in funding markets have eased back. The three month London interbank offered rate for dollars, for example, on Friday dropped for a sixth straight session.
“There is such enormous demand for front-end assets for flight to safety reasons that despite the $1.3 trillion surge of bill supply, front-end rates have continued to be pressured lower,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities. “The Fed probably wants to give themselves more room, adjusting rates modestly higher in a technical fashion.”
The current effective rate is now six basis points below IOER — presently 0.10%. May fed funds futures indicate a rate of 0.08%, or 4 basis points above the current effective fed funds rate, which suggests traders are pricing about an 80% chance of a 5 basis point increase in IOER when Fed policy makers meet next week.
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