The U.S. Federal Reserve’s benchmark interest rate has inched up to its highest level in 11 years, even though the American central bank has sent a clear message that it is done tightening policy indefinitely.
In recent days, the effective fed funds rate, which targets the overnight level that banks charge each other for loans, has moved up to 2.44%... the highest since March 2008 and is just six basis points from the top of the target range and the closest to the top since December, when the Fed last raised rates.
For now, the move is perceived as not being especially thorny, as there is still room between the current level and the top of the 2.25% to 2.5% range in which the rate is supposed to trade. But moves toward the upper end of the band have prompted action before, and the trend likely will be a topic of discussion at next week’s Federal Open Market Committee meeting.
When the Fed first began raising rates in December 2015, it succeeded in keeping the funds rate around the midpoint of the target range. But that has changed over the past year. Experts say the only concern is whether the central bank will have to make a technical adjustment in the future from preventing it from going higher.
Twice last year, the FOMC approved 20 basis point increases in the interest it pays on excess bank reserves, or the IOER, rather than the 25-basis point hikes it approved for the funds rate. The IOER generally has been raised at the same time as the funds rate and has acted as a barrier against the benchmark’s rise. The 20-basis-point hike was aimed at containing the rise of the funds rate as it reached the upper bounds of the target range.
However, the funds rate for the first time is now trading above the IOER, which technically is set as a floor for the EFFR but has more often acted as a ceiling. The FOMC may consider another adjustment to the funds rate next week, though at this point that is unlikely.
