There's a cash shortage on Wall Street -- and it's forcing the Fed to stem a surge in repo rates.
Investors looking at the Chicago Mercantile Exchange’s indicator of the chance of a Federal Reserve interest rate-cut this week may be surprised to find that the probability of the Federal Reserve easing policy for the second time this summer only stands at 61%.
The lack of cash circulating in short-term money markets has pushed up the effective fed funds rate, the actual level at which banks lend to each other overnight. As a result, Hills says the CME’s tracker of rate decision probabilities may be reflecting the odds for the effective fed funds rate to remain elevated due to this week’s funding squeeze, rather than expectations for the fed funds target range going forward.
Usually, this is seen as a temporary state of affairs because banks have no incentive to borrow from another bank when it could simply withdraw funds on deposit at the Fed, but the persistence of the fed funds rate above the IOER has raised questions whether the central bank is losing its grip over its benchmark interest rate.
Analysts say a perfect storm of factors may have been responsible for the spike in repo rates this week. “The TGA rebuild ... represents a large reserve drain and the withdrawal of this cash from money markets has materially tightened funding,” wrote Mark Cabana, head of short-term rates at Bank of America Merrill Lynch on Monday.
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