- Reuters – U.S. fed funds rate gap vs interest on excess reserves grows
The average borrowing cost for U.S. banks to borrow excess reserves overnight rose further above what the Federal Reserve pays on excess reserves on Wednesday, according to New York Federal Reserve data on Thursday. …The gap between the two interest rates suggested tighter conditions in money markets this week as investors withdrew huge amounts of cash from bank and money market amounts to make their annual tax payments by the April 15th deadline. The recent widening of the spread between the effective fed funds rate and the IOER has sparked worries about a dwindling amount of reserves that banks lend to one another, stemming from the Fed’s reduction of its balance sheet and the government’s heavy issuance of Treasury bills to fund its spending.
- The New York Fed – Lorie K. Logan: Observations on Implementing Monetary Policy in an Ample-Reserves Regime
Though rates transacted in the federal funds market are relatively stable, the EFFR has risen one basis point relative to IOER in recent weeks and is now above IOER. Since mid-March, overnight repo rates have generally traded above federal funds rates, providing an attractive investment opportunity for the Federal Home Loan Banks (FHLBs) that invest a portion of their liquidity portfolios in both markets. As the dominant lenders in the federal funds market, FHLBs may have been able to negotiate higher overnight lending rates with banks that regularly use federal funds to fund non-reserve assets or meet payments, and on occasion with banks that borrow to improve their Liquidity Coverage Ratios (LCR) by borrowing from government-sponsored enterprises.