Economics
Cracks Are Emerging in the Fed’s Floor as Key Target Rate Slides
- Effective fed funds rate fell for the second time in two weeks
- Deluge of cash continues to flood U.S. short-term markets
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The key benchmark that the Federal Reserve targets to control monetary policy dropped for the second time in two weeks, an indication that the glut of cash in the front-end is starting to spill into this corner of the funding markets.
The effective fed funds rate, which the central bank is currently aiming to keep within a range of 0% to 0.25%, slipped by 1 basis point to 0.08% on Aug. 27, the Fed said Monday. That’s closed the gap to the offering yield on the Fed’s overnight reverse repurchase agreement facility, which is supposed to act like a floor for the front end, to just 3 basis points. It could narrow further amid supply-demand imbalances and month-end effects with banks pulling back from funding markets to beef up balance sheets.