FOMC to raise the Fed funds target range by 25bp – Danske Bank

At the FOMC meeting this week, Research Team at Danske Bank expects the Fed to raise the Fed funds target range by 25bp to 0.500.75%, from the current 0.25-0.50%, by setting the IOER at the top of the range (0.75%) accompanied by the ON RRP rate 25bp lower at the bottom of the range (0.50%).

Key Quotes

“In our view, the ON RRP facility is likely to remain unchanged for now (except the offering rate) with no cap on the overall size but caps on individual usage, i.e. an overall size of the ON RRP facility limited only by the value of Treasury securities held outright in the SOMA (currently USD2,405bn) with each counterpart having a limit of USD30bn per day.”

“We do not expect the Fed to change its reinvestment policy in 2017.”

“We expect the effective Fed funds rate to remain in the middle of the target range. However, there is a risk the effective Fed funds rate could fall below the ON RRP rate over the turn of the year.”

“The higher effective Fed funds rate in H2 16 appears to reflect more cautious liquidity management in the wake of the UK referendum and shifting investments by money market funds in advance of the money market reform applicable since October 2016.”