The U.S. Federal Reserve's key interest rate broke above a critical level f...
NEW YORK - The U.S. Federal Reserve’s key interest rate broke above a critical level for the first time on Wednesday, according to newly released data, which may raise alarm about the central bank’s effectiveness in controlling short-term rates if the rate increases further.
The rise in the average cost for U.S. banks to borrow excess reserves from each other overnight, known as federal funds, above what the Fed pays on excess reserves came on the same day that Fed policy makers put forth a plan to halt the shrinkage of the U.S. central bank’s bond holdings. Some traders have blamed the shrinkage in the Fed’s bond holdings for recent turbulence in money markets.The average, or “effective,” federal funds rate came in at 2.41 percent on Wednesday, above the 2.
Wednesday’s rise in the fed funds rate also fueled speculation that the Fed may target another overnight rate as the daily activity in the fed funds market has dwindled over the past decade. In December, the shortage of excess reserves was so acute that it sent borrowing costs soaring in other parts of money markets that Wall Street relies on to fund its trades.
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