FXStreet (Guatemala) – Analysts at Rabobank explained how the Fed might intend to raise rates.
Key Quotes:
“While the Fed is about to hike for the first time since 2006, its ability to control the federal funds rate has diminished after three rounds of quantitative easing have pumped up the amount of reserves in the system.
Consequently, the Fed will continue to use a target range for the federal funds rate as monetary policy is tightened, instead of returning to a target level.
What’s more, it will be difficult to lift the federal funds rate by open market operations. Therefore, the target range for the fed funds rate will be supported by a ‘double floor’ system with the overnight reverse repo (ON RRP) rate at the bottom and the interest on excess reserves (IOER) rate at the top of the range.
In addition to these overnight facilities, the Fed will use the term deposit facility (TDF) and term reverse repos (Term RRP) to push up the federal funds rate.
However, as the Fed is heading into uncharted territory we may see adjustments to the Fed’s rates system along the way. The spread between the IOER and ON RRP rates, the capacity of the ON RRP facility, and the use of the TDF and term RRP facilities may all be adjusted. In the end, if the Fed finds it difficult to control the fed funds rate or if the take-up on the ON RRP facility gets too large, it may even be forced to speed up the normalization of its asset portfolio.”
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