Tags: Credit | Suisse | Fed | Borrowing

Credit Suisse: Fed Won't Boost Borrowing Costs as High as Many Think

Tuesday, 15 July 2014 06:50 PM

Federal Reserve plans to keep the gap between interest rates on bank deposits relative to reverse-repurchase agreements wide means borrowing costs will be lower than traders predict when policy makers begin to raise interest rates, Credit Suisse Group AG said.

Fed Chair Janet Yellen told U.S. lawmakers Tuesday the central bank plans to keep the rate it offers banks on overnight deposits well above what it pays at its reverse-repurchase agreement facility. The gap is now 20 basis points, or 0.20 percentage point, with the interest rate on excess reserves, known as the IOER, at 0.25 percent and the reverse repo rate, dubbed the RRP, at 0.05 percent.

“A 20 basis-point spread between the RRP and the IOER implies a lower effective funds rate near the first hike relative to what the market had expected,” New York-based Credit Suisse strategists including Ira Jersey and Carl Lantz wrote in a client note. “Signs are that the Fed will be less aggressive in using the RRP facility than we and many market participants had thought. That implies less scope for a pre-tightening market scare on the back of rate harmonization and a slightly lower expected path for funding rates.”

The fed effective funds rate, at 0.09 percent on July 14, is a volume-weighted average of rates on trades arranged by major brokers. The central bank’s benchmark rate target has been in a range of zero to 0.25 percent since December 2008.

Congressional Testimony

Yellen spoke in her semi-annual testimony on the economy to the Senate Banking Committee. She testifies Thursday to the House Financial Services Committee. Credit Suisse is one of the 22 primary dealers that trade with the Fed.

Federal funds futures contracts traded at the CME Group Inc. that expire in September 2015, the month Credit Suisse’s economists forecast the first increase in the benchmark interest-rate target, traded Tuesday at 0.51 percent. That compares with 0.46 percent at the end of last month.

“To maintain a relatively large spread between the interest rates we pay on overnight reverse RPs and the interest rate on excess reserves” would help reduce usage and risks involving the repurchase facility, Yellen said. “The larger that spread, the less used that facility will be.”

The Fed has been testing since September an overnight reverse-repo facility as way to put a floor under short-term money-market rates and a potential aid when it pulls back from monetary accommodation.

‘Cause Flight’

“We do have concerns about allowing that facility to become too large or to play too prominent a role,” Yellen said. “If stresses were to develop in the market, in effect it provides a safe haven that could cause flight from lending to other participants in the money markets.”

The facility allows banks, broker-dealers, money-market funds and some government-sponsored enterprises to lend the Fed cash overnight at a fixed rate, currently 0.05 percent, in exchange for borrowing Treasuries in reverse repo transactions.

The facility “I think of as a backup tool that will be used to help us control the federal funds rate,” Yellen said.

Central bankers discussed a strategy for the eventual exit from monetary easing at their policy meeting last month, with most agreeing the interest rate on excess reserves “should play a central role,” according to minutes of the June 17-18 meeting released on July 9.

© Copyright 2020 Bloomberg News. All rights reserved.


   
1Like our page
2Share
StreetTalk
Federal Reserve plans to keep the gap between interest rates on bank deposits relative to reverse-repurchase agreements wide means borrowing costs will be lower than traders predict when policy makers begin to raise interest rates, Credit Suisse Group AG said.
Credit, Suisse, Fed, Borrowing
552
2014-50-15
Tuesday, 15 July 2014 06:50 PM
Newsmax Media, Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved