Wrightson ICAP: Fed Could Adjust Administered Rates In September

With the FOMC's debate over whether to go with a 50bp or 75bp hike in September potentially going "down to the wire", Wrightson ICAP wonders "whether September will turn out to be an opportune time for a tweak to the Fed’s administered rates". In particular, they expect that the IORB - RRP spread wil have to widen to incentivize a move out of the ON RRP facility and into reserves.

• "There is no immediate urgency about this, as banks still have an ample cushion of reserve balances. However, getting an early start might give the Fed a better sense of how much that spread will ultimately have to widen in order to reposition the RRP facility as a backstop for the market rather than as an everyday source of investment capacity."
• An IORB tweak is more likely to happen in September if they go 50bp rather than 75bp, since uncertain market pricing is currently above 50bp but well below 75bp, so a half point plus 5bp IORB tweak would bring IORB up by 55bp.
• If the Fed goes 75bp, the Fed could "nudge the RRP rate down in relative terms rather than nudge the IORB up", with IORB up by 75bp but ON RRP to 70bp.
• That being said, "while we think balance sheet normalization will ultimately require a wider IORB-RRP spread, it is not clear that the Fed has come to that conclusion", with the July meeting minutes signalling that a technical adjustment is not on FOMC members' radar yet.