April 22, 2019 / 3:54 PM / a month ago

MONEY MARKETS-U.S. fed funds rate's premium over interest on reserves hits record

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NEW YORK, April 22 (Reuters) - The average borrowing cost for U.S. banks to borrow excess reserves overnight increased further above what the Federal Reserve pays on excess reserves on Friday, according to New York Federal Reserve data on Monday.

The average or “effective” federal funds rate climbed to 2.44% from 2.43% on Thursday, bringing its premium over the interest rate the U.S. central bank pays on the excess reserves that banks leave with it (IOER) to a record 4 basis points. It was 3 basis points on Thursday.

The gap between the two interest rates suggested tighter conditions in money markets last week as investors withdrew huge amounts of cash from bank and money market amounts to make their annual tax payments by the April 15 deadline.

So far, Fed officials seem not worried about the fed funds’ current premium over IOER.

Still, some analysts including those inside the St. Louis Federal Reserve reckoned that a Fed program which allows banks to exchange their Treasuries holdings for cash would stem sudden spikes in money market rates.

Since tougher liquidity requirements were implemented in reaction to the global financial crisis, banks, especially large ones, appeared less willing to lend their reserves.

A Fed standing repo facility would reduce banks’ preference to hang on to their reserves because they could borrow from the central bank with Treasuries as collateral.

“The only way to know the true impact of how a repo facility could reduce reserve demand is to establish the facility and continue to let reserves decline organically as currency continues to grow,” St. Louis Fed economists David Andolfatto and Jane Ihrig wrote in a blog post published on Friday.

Last week, Lorie Logan, who is the head of market operations monitoring and analysis at the New York Fed, said the possibility of a Fed standing repo facility, is a discussion “really in its early stages.”

Reporting by Richard Leong Additional reporting by Trevor Hunnicutt Editing by Chizu Nomiyama and Susan Thomas

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