FOMC Excerpt: EFFR Moving Toward Top of Target Range-Text>

WASHINGTON (MNI) - The following are excerpts from the Federal Open 

Market Committee minutes of the May 1 - 2 meeting, published Wednesday:

     The deputy manager followed with a briefing focused on recent 

developments in the federal funds market, noting that the effective 

federal funds rate had increased in recent weeks and had moved toward 

the top of the target range for the federal funds rate. In large part, 

this development seemed to reflect a firming in rates on repurchase 

agreements (repos) that, in turn, had resulted from an increase in 

Treasury bill issuance and the associated higher demands for repo 

financing by dealers and others. Higher rates had reportedly made repos 

a more attractive alternative investment for major lenders in the 

federal funds market, thus reducing the availability of funding in that 

market and putting some upward pressure on the federal funds rate. While 

some of the recent pressure on the federal funds rate could be expected 

to fade over coming weeks as the market adjusts to higher levels of 

Treasury bills, the gradual normalization of the Federal Reserves 

balance sheet and the accompanying decline in reserves was anticipated 

to continue putting some upward pressure on the federal funds rate 

relative to the interest on excess reserves (IOER) rate. 

     The deputy manager then discussed the possibility of a small 

technical realignment of the IOER rate relative to the top of the target 

range for the federal funds rate. Since the target range was established 

in December 2008, the IOER rate has been set at the top of the target 

range to help keep the effective federal funds rate within the range. 

Lately the spread of the IOER rate over the effective federal funds rate 

had narrowed to only 5 basis points. A technical adjustment of the IOER 

rate to a level 5 basis points below the top of the target range could 

keep the effective federal funds rate well within the target range. This 

could be accomplished by implementing a 20 basis point increase in the 

IOER rate at a time when the Committee raised the target range for the 

federal funds rate by 25 basis points. Alternatively, the IOER rate 

could be lowered 5 basis points at a meeting in which the Committee left 

the target range for the federal funds rate unchanged. 

     In their discussion of this issue, participants generally agreed 

that it could become appropriate to make a small technical adjustment in 

the Federal Reserves approach to implementing monetary policy by 

setting the IOER rate modestly below the top of the target range for the 

federal funds rate. Such an adjustment would be consistent with the 

Committees statement in the Policy Normalization Principles and Plans 

that it would be prepared to adjust the details of the approach to 

policy implementation during the period of normalization in light of 

economic and financial developments. Many participants judged that it 

would be useful to make such a technical adjustment sooner rather than 

later. Participants generally agreed that it would be desirable to make 

that adjustment at a time when the FOMC decided to increase the target 

range for the federal funds rate; that timing would simplify FOMC 

communications and emphasize that the IOER rate is a helpful tool for 

implementing the FOMCs policy decisions but does not, in itself, convey 

the stance of policy. While additional technical adjustments in the IOER 

rate could become necessary over time, these were not expected to be 

frequent. A number of participants also suggested that, before too long, 

the Committee might want to further discuss how it can implement 

monetary policy most effectively and efficiently when the quantity of 

reserve balances reaches a level appreciably below that seen in recent 

years. 

     ** MNI Washington Bureau: (202)371-2121 ** 

[TOPICS: MMUFE$,M$U$$$,MT$$$$]