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Isn't this working as intended? Where else does the FED actually "enforce" its short term fed funds rate? I mean how else the current 2.00-2.25% rate is forced

Isn't this working as intended? Where else does the FED actually "enforce" its short term fed funds rate? I mean how else the current 2.00-2.25% rate is forced onto the financial system? Why else would anyone even care about what the FED funds rate is? In my home country the central bank rate is enforced by providing central bank deposits and central bank loans, available in unlimited quantity for commercial banks. When the market gets cash congested (like here) banks just start tapping the infinite central bank credit line, at central bank rate. Similarly if the market gets flush with cash banks just deposit it at the central bank. Ergo the market interbank lending rate is always between the central bank deposit and credit rates. The fact that it doesn't normally happen is like when most purchased options are not exercised but sold back. Yeah, sure, but if there was no possibility of exercising them then options would have no value. So it has to be there, then we can safely almost never use it.

rory096 7y ago
If you look at the trading desk logs, most recent operations have been reverse repos rather than repo operations. In other words, this week the Fed lent cash & borrowed treasuries to inject cash into the market, while in the recent past it's mostly borrowed cash & lent treasuries to remove cash from the market. That's consistent with the recent shift from a tightening (rising rates) environment to a softening environment. I agree it's not particularly newsworthy. https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000 https://apps.newyorkfed.org/markets/autorates/tomo-results-d...
nickles 7y ago
> I mean how else the current 2.00-2.25% rate is forced onto the financial system? Traditionally, Fed used open market operations to target the fed funds rate. This entailed either buying/selling treasuries or conducting repo operations (as was done here). This was a corridor system, as banks could earn no less than 0% interest keeping reserves on the Fed's balance sheet (no negative interest) and could finance at a cost no higher than the discount rate in which banks borrowed directly from the Fed's discount window (this, however, sent a very negative signal to the market). For the past decade, the Fed has relied on interest on excess reserves (IOER) to target the fed funds rate, a policy known as a floor system. Here, banks earn a given interest rate on reserves kept on the fed's balance sheet. The floor system theoretically ensures short term rates do not drop below the IOER rate (although it is not always the case). This does not entail engaging in open market operations. > Why else would anyone even care about what the FED rate is? All dollar interest rates are impacted in one way or another by the fed funds rate. The strength of the dollar is also impacted by the fed funds rate, as it may become more or less attractive to keep balances in the US. The floor system currently employed makes it less attractive for banks to use excess reserves to make loans, as the risk free rate (on the fed balance sheet) is greater. This diminishes the money multiplier effect that banks have. Additionally, some foreign institutions are able to keep money on the fed's balance sheet, helping them avoid negative interest rates. Again, this disincentivizes them from making loans and also undermines monetary policy implemented by their local central banks. Finally, some currencies have a USD peg (e.g. HKD). These pegs effectively import Federal Reserve monetary policy (to help mitigate the risk of currency crises) which affects the local economies.
- H8crilA 7y ago
  It sounds like you agree that this is the mechanism of choice used to push down overnight interbank interest rates to keep them in line with the federal funds rate. IOER, by design, provides just a floor. Discount rate is, by design, quite a bit higher than the fed funds rate, and is only tapped for credit in emergencies. Also this is what Wikipedia says on the topic: > The (effective) federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York which deals primarily in domestic securities (U.S. Treasury and federal agencies' securities). https://en.wikipedia.org/wiki/Federal_funds_rate#Comparison_with_LIBOR https://en.wikipedia.org/wiki/Federal_funds_rate#Comparison_... So, WAI. We just haven't seen cash injection through this mechanism in a while.
  - nickles 7y ago
    > Discount rate is, by design, quite a bit higher than the fed funds rate, and is only tapped for credit in emergencies. That's right. Open market operations were traditionally used to target the fed funds rate. The discount window does serve as the upper bound though in extreme cases. Typically, reserves would be loaned overnight between banks on the fed funds market. This market has been decimated by the floor system. > IOER, by design, provides just a floor. In theory, yes. It has also acted as a ceiling. Not all institutions with access to Fed's balance sheet are able to receive IOER (e.g. GSE's). These entities loan the money to banks overnight at a rate below IOER. The banks then earn IOER on that money. This arbitrage can lead to an effective fed funds rate below IOER.
    - H8crilA 7y ago
      > This market has been decimated by the floor system. You mean there has been so much cash around that nobody really needed to get cash via the fed funds market, for quite a while? It does seem like the spread between fed funds and IOER is generally just a few bp, maybe even 1bp sometimes, which I guess is where the "ceiling" you were talking about comes from: https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS

rory096 7y ago

If you look at the trading desk logs, most recent operations have been reverse repos rather than repo operations. In other words, this week the Fed lent cash & borrowed treasuries to inject cash into the market, while in the recent past it's mostly borrowed cash & lent treasuries to remove cash from the market. That's consistent with the recent shift from a tightening (rising rates) environment to a softening environment. I agree it's not particularly newsworthy. https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000 https://apps.newyorkfed.org/markets/autorates/tomo-results-d...

nickles 7y ago

> I mean how else the current 2.00-2.25% rate is forced onto the financial system? Traditionally, Fed used open market operations to target the fed funds rate. This entailed either buying/selling treasuries or conducting repo operations (as was done here). This was a corridor system, as banks could earn no less than 0% interest keeping reserves on the Fed's balance sheet (no negative interest) and could finance at a cost no higher than the discount rate in which banks borrowed directly from the Fed's discount window (this, however, sent a very negative signal to the market). For the past decade, the Fed has relied on interest on excess reserves (IOER) to target the fed funds rate, a policy known as a floor system. Here, banks earn a given interest rate on reserves kept on the fed's balance sheet. The floor system theoretically ensures short term rates do not drop below the IOER rate (although it is not always the case). This does not entail engaging in open market operations. > Why else would anyone even care about what the FED rate is? All dollar interest rates are impacted in one way or another by the fed funds rate. The strength of the dollar is also impacted by the fed funds rate, as it may become more or less attractive to keep balances in the US. The floor system currently employed makes it less attractive for banks to use excess reserves to make loans, as the risk free rate (on the fed balance sheet) is greater. This diminishes the money multiplier effect that banks have. Additionally, some foreign institutions are able to keep money on the fed's balance sheet, helping them avoid negative interest rates. Again, this disincentivizes them from making loans and also undermines monetary policy implemented by their local central banks. Finally, some currencies have a USD peg (e.g. HKD). These pegs effectively import Federal Reserve monetary policy (to help mitigate the risk of currency crises) which affects the local economies.

H8crilA 7y ago
It sounds like you agree that this is the mechanism of choice used to push down overnight interbank interest rates to keep them in line with the federal funds rate. IOER, by design, provides just a floor. Discount rate is, by design, quite a bit higher than the fed funds rate, and is only tapped for credit in emergencies. Also this is what Wikipedia says on the topic: > The (effective) federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York which deals primarily in domestic securities (U.S. Treasury and federal agencies' securities). https://en.wikipedia.org/wiki/Federal_funds_rate#Comparison_with_LIBOR https://en.wikipedia.org/wiki/Federal_funds_rate#Comparison_... So, WAI. We just haven't seen cash injection through this mechanism in a while.
- nickles 7y ago
  > Discount rate is, by design, quite a bit higher than the fed funds rate, and is only tapped for credit in emergencies. That's right. Open market operations were traditionally used to target the fed funds rate. The discount window does serve as the upper bound though in extreme cases. Typically, reserves would be loaned overnight between banks on the fed funds market. This market has been decimated by the floor system. > IOER, by design, provides just a floor. In theory, yes. It has also acted as a ceiling. Not all institutions with access to Fed's balance sheet are able to receive IOER (e.g. GSE's). These entities loan the money to banks overnight at a rate below IOER. The banks then earn IOER on that money. This arbitrage can lead to an effective fed funds rate below IOER.
  - H8crilA 7y ago
    > This market has been decimated by the floor system. You mean there has been so much cash around that nobody really needed to get cash via the fed funds market, for quite a while? It does seem like the spread between fed funds and IOER is generally just a few bp, maybe even 1bp sometimes, which I guess is where the "ceiling" you were talking about comes from: https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS