from the Chicago Fed
— this post authored by Sam Schulhofer-Wohl, senior vice president and director of financial policy
In mid-September 2019, there were sudden, large fluctuations in short-term interest rates. Why did these fluctuations happen, and what do they tell us about the Federal Reserve’s monetary policy toolkit?
Overnight interest rates are a basic building block of most financial transactions. Banks, securities dealers, and other large financial institutions obtain much of their funding by borrowing overnight. The costs of this overnight borrowing then influence the rates that families and businesses pay for longer-term loans and receive on their investments. The Federal Reserve’s monetary policymaking body, the Federal Open Market Committee (FOMC), also announces its monetary policy decisions by setting a target for rates on certain overnight loans.
In recent years, overnight rates have, for the most part, been remarkably stable. Figure 1 shows the effective federal funds rate (EFFR), which is a volume-weighted median of rates paid by banks and which the FOMC sets a target range for, as well as the secured overnight financing rate (SOFR), the median rate on overnight collateralized loans known as repos that are made to a wide range of institutions. From 2015 until early September 2019, the EFFR had stayed within the FOMC’s target range on all but one day and rarely moved much even within the target range. The SOFR had been somewhat more variable, especially around quarter-end and year-end financial statement reporting dates, but rarely moved more than a quarter of a percentage point outside the EFFR target range. Then, on September 17, 2019, the EFFR moved above the top of the target range and the SOFR soared nearly 3 percentage points.
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Source
http://app.frbcommunications.org/e/er?s=1064&lid=6691 &elqTrackId=E9967CABD9307404FA6FF4D2D82C4538 &elq=97e5d5fe0c64416f87781731d31de0ce &elqaid=16038 &elqat=1
