(Bloomberg) — The key benchmark that the Federal Reserve targets to control monetary policy dropped for the first time this month, dragged down as growing imbalances in the Treasury-bill market weigh on short-term dollar rates.
The effective fed funds rate, which the central bank is currently aiming to keep within a range of 0% to 0.25%, slipped by one basis point to 0.06% on Thursday. It was the first drop to that level since a brief dip at the end of last quarter and comes just after the central bank opted not to tinker further with some of the tools it uses to control the benchmark.
While officials chose not to shift its so-called administered rates at the Federal Open Market Committee meeting on Wednesday, a persistently lower rate could once again raise the specter of tweaks to the interest rate on excess reserves and the rate for the Fed’s reverse repurchase agreement facility, even as it keeps its main target range unchanged.
A decline in the effective fed funds rate to 0.06% “would create a presumption of a tweak to the overnight RRP and IOER rates no later than the next FOMC meeting,” Wrightson ICAP economist Lou Crandall said in a note to clients published before the most recent reading. “However, the bar for an intermeeting move is probably higher, so the softening that we expect would not necessarily prompt any adjustments in the Fed’s operational parameters in the near term.
Officials from the central bank, including Chair Jerome Powell and the New York Fed’s Lorie Logan, have said in recent months that they are open to adjusting administered rates as needed.
There was a large transaction in June fed funds futures Thursday, apparently a sale, that may be anticipating an upward adjustment by policy makers.
In the meantime, the Fed has made adjustments to its overnight reverse repo facility to help control short-term rates. The New York Fed announced Friday that it was adjusting its counterparty eligibility criteria to make it more accessible. Last month, policy makers increased the daily counterparty limits on its overnight reverse repo facility to $80 billion per day from its previous level of $30 billion to ensure it helped control short-term rates.
Rates for short-term dollar borrowing have been driven to zero and below, weighed down by Fed asset purchases, a drawdown of the U.S. Treasury’s mammoth cash pile that’s cutting into the supply of T-bills, and a shift from bank deposits to money-market funds. The potential reimposition of America’s debt ceiling later this year threatens to exacerbate this dynamic and this week saw the government itself sell bills at a zero yield for the first time since early 2020.
Debt ceiling? With M2 Velocity tanking, there seems little to warrant more money printing.