Fed Funds Futures Volume Soars on Minutes' Mention of IOER Tweak

Interest-rate traders were caught by surprise Wednesday, sending futures volume surging, after the minutes from the Federal Reserve’s May meeting referenced a possible tweak to how officials set the rate for interest on excess reserves.

Implied rates on fed funds futures tumbled as much as 9 basis points, showing traders were betting on a less aggressive policy path. A rate increase is widely expected at policy makers’ next meeting, on June 12-13.

Volumes for July -- the contract used to measure June rate-hike probabilities -- surged to almost 200,000 contracts, the highest since March 2017, as traders covered short positions. October futures, a proxy for September Fed odds, were the busiest in data going back to the 1980s.

“This is short-covering as it completely caught the market off-guard,” said John Brady, a managing director at R.J. O’Brien & Associates in Chicago.

In the minutes, Federal Open Market Committee participants “generally agreed” it could be appropriate to make a “small technical realignment” to their monetary-policy approach by increasing the interest on excess reserves rate, or IOER, by 20 basis points, even when policy makers raise the target range for the fed funds rate by 25 basis points. In the Fed’s outline of its policy normalization plans, it says it sets the IOER rate equal to the top of the fed funds target range.

The current target range is 1.50 percent to 1.75 percent.

— With assistance by Edward Bolingbroke

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