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CNBC: Fed's Rising Key Rate Might Become Problem

CNBC: Fed's Rising Key Rate Might Become Problem
(Matthew Veldhuis/Dreamstime)

By    |   Wednesday, 24 April 2019 08:27 AM

The Federal Reserve’s benchmark interest rate has inched up to its highest level in 11 years even though the central bank has sent a clear message that it is done tightening policy indefinitely.

The average borrowing cost for U.S. banks to borrow excess reserves overnight was unchanged on Monday, holding above what the Federal Reserve pays on excess reserves, New York Federal Reserve data released on Tuesday showed.

The average or “effective” federal funds rate was 2.44% for a second day. Its premium over the interest rate the U.S. central bank pays on the excess reserves that banks leave with it stayed at a record 4 basis points, Reuters explained.

It was also 6 basis points below the top end of the Fed’s target range on short-term interest rates. 

“At 6 basis points from the top of the range, you’re still within the target. The question becomes whether they think technical pressure is driving this,” Lou Crandall, chief economist at Wrightson ICAP and formerly of the New York Fed, told CNBC . “The only concern is whether you’ll have to make a technical adjustment in the future from preventing it from going higher.”

Why the funds rate has risen above the interest on excess reserves (IOER) is somewhat of a market mystery, though Fed officials attribute it to higher yields on the reverse repo markets that have pushed up the effective federal funds rate, CNBC explained .

"Some market participants have feared that the Fed’s balance sheet reduction program, in which it is allowing some proceeds from its bond portfolio to roll off each month, also could be exerting upward pressure on rates," CNBC said.

“As long as these rates remain relatively stable and at modest spreads above IOER, we don’t see this as indicating that reserves are not well supplied,” Lorie K. Logan, senior vice president at the New York Fed, said in a speech last week, CNBC reported.

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The Federal Reserve’s benchmark interest rate has inched up to its highest level in 11 years even though the central bank has sent a clear message that it is done tightening policy indefinitely.
fed, rising, ket, interest, rate, cnbc
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2019-27-24
Wednesday, 24 April 2019 08:27 AM
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