BofA: 60% Chance Of IOER/ON RRP Adjustment By June FOMC

With reserves soaring and short end rates BofA ascribes a 60% chance of the Fed adjusting administered rates at or before the June 15-16 FOMC meeting, though this has been revised down from 80% since the Treasury refunding announcements (which showed a higher expected Treasury cash balance / fewer reserves in the system).

• In the event of an adjustment, BofA sees IOER up +5bps and ON RRP +2-3bps, which would in their view help by widening the IOER/ON RRP corridor to allow money markets more room to trade and give a "small cushion" above zero for ON RRP in order to resist money market rates from trading negative. They also note that raising ON RRP rates would help support money market funds, compensating them "for their ability to drain reserves from the banking system".
• BofA also sees "a strong case" for the Fed to allow their bill holdings ($326B) to mature without reinvestment.
• These are all good reasons to anticipate a potential adjustment from the Fed - however as our Policy Team has reported, the Fed is likely to hold off on such changes for the coming months, eyeing debt limit negotiations going into the fall.