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Following the announcement Wednesday by Federal Reserve Chair Janet Yellen, the Fed on Thursday increased the federal funds rate by a quarter-point from near zero, where it had been since the 2008 financial crisis. Though money markets are still awash in nearly $3 trillion in excess cash injected by the Fed through bond purchases, and despite warnings and concerns of possible ramifications upon markets, markets operated normally Thursday, and the benchmark rate rose 0.2 percentage point, or 20 basis points, about the middle of the Fed’s intended range.
Bloomberg reported Thursday trading in the fed funds market went "extremely smoothly ... The whole fed funds market seemed to adjust with relative ease this morning and everything just set at a higher level," said Bill List, capital markets manager at Federal Home Loan Bank of Pittsburgh. The Fed turned to the repo market to tighten--conducting its first actual liftoff overnight borrowing operation in that market Thursday afternoon. The Fed drained $105 billion through reverse repos at a 0.25 percent rate, up from the $102 billion it borrowed Wednesday at the old 0.05 percent rate. That was all it took--$105 billion--although the Fed was prepared to do more, potentially as much as $2 trillion according to Bloomberg.
The Fed’s daily reverse repo borrowings will swell in coming weeks, and could reach $1 trillion by next year. Zoltan Pozsar, director of U.S. economics at Credit Suisse Securities USA LLC in New York and former researcher at the New York Fed and U.S. Treasury, told Bloomberg that as the Fed’s rate increase kicks in and money-market funds start advertising higher yields, hundreds of billions of dollars will be lured from deposits in banks, which the funds will lend to the Fed through reverse repos. "It’s going to take about a month for the money fund portfolios to turn over ... When investors start seeing yields in the money funds go up and yields on deposits not go up, that’s when they are going to start to move money."
The Fed and Wall Street Differ on How High Rates Will Go https://t.co/TiiSi0uI6B pic.twitter.com/Qm2FaPPBIw— Bloomberg Markets (@markets) December 17, 2015
Sources: federalreserve.gov and bloomberg.com