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While it received far less attention that the Fed’s dot plot, the only thing that the Fed actually did change yesterday were its administered rates, as it raised the rate on its overnight Reverse Repo facility from 0% to 0.05% and the rate on excess reserves (IOER) from 0.10% to 0.15%.
Since the RRP hike meant the GC rate would also have to increase, we noted last night that “with both market rates and RRP at .05%, there’s really no economic incentive for cash investors to move cash to the Repo market.”
Furthermore, now that the Fed is actually paying counterparties a modest but non-negligible 5bps on reserve deposits, it has made the RRP even more attractive compared to when it paid nothing (when the RRP rate was 0.0%), as it now generates a higher risk free yield than many short-term Bills…
To read more visit Zero Hedge.
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