The Federal Reserve’s main market interest rate has drifted back close to the top of the central bank’s target range, highlighting the difficulty of normalizing monetary policy after the biggest central banking experiment in the modern era.
The Fed funds rate, which the Fed is attempting to keep in the middle of its target range of 2 percent to 2.25 percent range, has risen to 2.20 percent, hitting what the central bank had hoped would be a technical ceiling.
The Fed pays 2.20 percent in interest on excess reserves (IOER) that banks hold in their accounts with the Federal Reserve. The Fed funds rate is the rate at which banks borrow those reserves.
The upward drift in the Fed funds rate adds another headache for the central bank as it raises interest rates to more normal levels and works to reduce its swollen balance sheet without causing disruptions in financial markets.
“It suggests that the tools the Fed are using to determine policy rates are less effective,” said Joshua Younger, an interest rate analyst at JPMorgan Chase. “Not ineffective, but definitely less.”
Read more in the Milwaukee Business Journal.