New research from Danske Bank Markets
This presentation gives a short overview of the Federal Reserve's policy tools - in particular, the tools likely to be used to steer the fed funds rate into the new fed funds target range after the first rate hike.
The Fed will continue to target a range for the fed funds rate going forward. The interest rate on excess reserves (IOER) will be set at the top of that range and the overnight reverse repurchase agreements (ON RRP) rate will be set 25bp below that rate (currently 20bp below). As we expect a 25bp rise, that implies that the IOER and the ON RRP will be set at 0.50% and 0.25%, respectively. The ON RRP will accompany the IOER in setting a floor under USD money market rates and will be temporarily raised from the current level of USD300bn to support the lift-off. Due to the very large excess liquidity, we anticipate the effective federal funds rate will settle below the target range midpoint of 37.5bp. A settle range of 31-37bp seems likely, in our view. Changes to rates and facilities would be effective the day after the FOMC meeting and FOMC will release an appendix with all operational details in conjunction with the FOMC statement.
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