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FED liftoff series – Decision day – IOER, discount rates and RRP

We are only hours away from a highest probability chance of a rate hike of 25 basis points from FED, after a decade of no hikes. We in earlier posts have addressed the possible implications, impact of FED hike that might have on global economy over a span of time and in this decision day part we focus on just today.

We expect FED, to hike Federal Funds rate by 25 basis points, to new range of 0.25-0.5% at today's meeting, however some details also need to be watched other than the funds rate.

Discount rate - Discount rates are at which financial institutions borrow funds from regional FEDs. These discount windows serve key purpose at time of funding stress. Current rates are 0.75% for primary credit, 1.25% for secondary credit and 0.2% for seasonal credit. We expect FED to hike rates here too.

IOER/IORR - FED pays maximum of the range, which is currently 0.25% to on the excess money parked by the banks and also on required reserve. So we naturally expect, rates for these two to be 0.5%.

RRP - Reverse repurchase Agreement is what FED has been experimenting with in overnight auction, since 2013 and finally the time has come, when FED might have to need it and set it higher than prior today. FED has already announced term RRP worth $300 billion to be conducted in three phase till December 30th. FED is likely to announce the introduction of overnight RRP from tomorrow onwards, for which cap can be kept as high as $750 billion.

RRPs are expected to provide collateral liquidity in the market as it has somewhat stressed from regulatory issues and FED asset purchase. It would also keep a check on FFR and expected to help the normalizing process.

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