Fed Rate Dips to Lowest in a Year, Fueling Debate About Tweaks

(Bloomberg) -- The key benchmark that the Federal Reserve targets to control monetary policy dropped to its lowest level in more than a year on the final day of April, raising further questions about whether the central bank might need to tinker with some of the tools it uses to control it.

The effective fed funds rate, which the central bank is currently aiming to keep within a range of 0% to 0.25%, slipped by one basis point to 0.05% on Friday, the monetary authority said Monday. That followed a one-basis-point decline the day before that was the first dip since last quarter.

While officials chose not to shift the Fed’s so-called administered rates at the most recent Federal Open Market Committee meeting last Wednesday, a persistently lower rate could once again raise the specter of tweaks to the interest rate on excess reserves and the rate for the Fed’s reverse repurchase agreement facility, even as it keeps its main target range unchanged. The drop to 0.05% may in part be related to end-of-month effects and market participants will be keenly attuned to the next reading to gauge whether it is just a temporary dip or part of a more persistent shift that risks prompting the Fed to act.

“A one-day dip to 0.05% would probably not be enough to prompt an intermeeting rate tweak by the Fed,” Wrightson ICAP economist Lou Crandall wrote in a note before the data was released. If it were to stay at that level though, Crandall believes the Fed “would probably move promptly” to adjust the interest on excess reserves rate and the rate for the Fed’s reverse repurchase agreement facility, even as it keeps its main target range unchanged.

Officials from the central bank, including Chair Jerome Powell and the New York Fed’s Lorie Logan, have said in recent months that they are open to adjusting administered rates as needed.

Rates for short-term dollar borrowing have been driven to zero and below, weighed down by Fed asset purchases, a drawdown of the U.S. Treasury’s mammoth cash pile that’s cutting into the supply of T-bills, and a shift from bank deposits to money-market funds. The potential reimposition of America’s debt ceiling later this year threatens to exacerbate this dynamic. Last week saw the government sell bills at a zero yield for the first time since early 2020.

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