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The key benchmark which the Federal Reserve targets to control monetary policy for the first time this month was dragged down as growing imbalances in the Treasury-Bill market weigh on short-term dollar rates.
The effective fed fund rate, which the central bank is currently aiming to keep within a range of 0% to 0.25%, slipped to 0.06% on Thursday by one basis point.It was the first drop to this level since a brief dip at the end of the last quarter and comes just after the central bank decided not to tinker further with some of the tools they use to control the benchmark.
While officials choose not to lower its so-called administered rates at the Federal Open Market Committee meeting on Wednesday, a downward rate could once again raise the specter of revisions to the interest rate on excess reserves and the rate for the Federal Reserve Repurchase Agreement Facility, even though it keeps its main target range unchanged.
A decline in the effective fed funds rate from 0.06% '' would create a presumption of a tweak to the overnight RRP and IOER rates no later than the next FOMC meeting, Wrightson ICAP economist Lou Crandall said in a note to clients published before the most recent readings.'However, the bar for an intermeeting move is likely lower so that the softening we expect would not necessarily prompt any adjustments in the Fed's operational parameters in the near term.
Officials from the Central Bank, including Chair Lorie Logan and New York Fed CEO Jerome Powell, have said in recent months that they are open to adjusting as needed fixed rates.
There was a large transaction in futures of fed funds in June Thursday, apparently a sale, which may be anticipating an upward adjustment by policy makers.
In the meantime, the Fed has made changes to its short-term Reverse Repo Facility to help control overnight rates.The New York Fed announced on Friday that it was adjusting its counterparty eligibility criteria to make it more accessible.Last month, policy makers hiked the daily counterparty limits on its overnight reverse repo facility from its previous low of $30 billion per day to $80 billion per day to help control short-term rates.
Rates for short-term dollar borrowing have been driven to zero and below, weighed down by Fed asset purchases, a sell-off of the Mammoth Cash pile that cuts into the supply of T-bills and a shift from banking deposits to money-market fundsThe possibility of retrocession of the U.S. debt ceiling later this year threatens to exacerbate this dynamic and this week the government itself sold bills at zero yield for the first time since early 2020.
The Fed is trying to increase its ability of mopping up liquidity it is creating under pressure on the money market rates, said Conrad DeQuadros, senior economist at Brean Capital LLC in a note.
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