As predicted, FDIC assessment on global deposits upsets short-term returns.
US money-market rates have hit one-year lows in response to changes in banks’ FDIC insurance assessment, which became effective April 1. The New York Fed said its daily fed funds effective rate fell to 0.09 percent on Monday, its lowest level since June of last year. Similarly, average one-day repo rates fell to 0.028 percent, the lowest point since last May, according to Bloomberg.
These latest data points are fully in line with what Citi presented to clients last week; namely, that expectations of the FDIC assessment changes had already pushed down fed funds rates from the beginning of the year.
The FDIC assessment, which is based on all of US banks’ liabilities (or assets net of tangible equity), is causing banks to shy away from opportunistic short-term borrowing from the Fed or repo markets, which limits market demand. Meanwhile, the supply of securities in the market has been dampened by the US Treasury’s pull-back from issuing Supplementary Financing Bills, due to the debt ceiling limits that Congress has yet to raise, which has also helped short-term rates to fall.
This same supply/demand dilemma has money-market fund companies scrambling to keep their portfolios supplied with assets that attract any sort of demand, while also complying with SEC rule 2a-7 changes.
Fed exit implications
For treasurers looking to manage the Fed exit strategy from stimulating the economy to tightening, the unintended consequences of new financial regulations on short-term rates will make it interesting to see how this affects the Fed’s ability to influence rates when it determines it wants to start ratcheting up its target rate. The more optimistic scenarios have the Fed continuing to push back an actual rate increase based on its ability to signal tightening in other ways. The extent to which the market is responding to other signals might make these more optimistic Fed exit scenarios less likely.