While an increase in Fed fund rates is not expected today, the central bank may decide to raise the IOER, the excess reserve rate. The Fed introduced the rate on excess reserves in 2008. This rate is used to control the level of interest rates within a given range (at the moment the main interest rate range is 0-0.25%).
Currently, the IOER rate is at 0.1% and it is speculated that a drop in the Fed's effective interest rate below 0.05% could lead to a change in the IOER rate to limit its further decline. The decreases are in turn related to the huge excess liquidity in the market, which is controlled by reverse repo operations. Excessive liquidity leads to the choking of short-term interest rates. Nevertheless, in May the effective Fed rate was at 0.06%.
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Create account Try a demo Download mobile app Download mobile appIf the Fed decides that there is actually too much liquidity in the market, it could decide to raise the IOER rate. Currently, such a move is indicated by Bank of America, JP Morgam Wrightson, Deutsche Bank and Wells Fargo. On the other hand, Oxford Economics, Jefferies, Credit Suisse, Standard Chartered, BMO and TD Securities believe that an increase will not take place.
The main purpose of the rate hike would be to reduce the pressure on further declines in short-term interest rates. The Fed wants to remain credible in keeping interest rates within range. Certainly, such a move could be perceived slightly pro-dollar, but at the same time it would delay the discussion regarding the tapering of the QE program. Source: xStation5
