BIS central bankers’ speeches  11  16  In July 2015, the FOMC announced that changes in administered rates would go into effect on the day after its policy decision. Otherwise, the intraday timing of a policy change could result in various operations being conducted with inconsistent settings. 17  ON RRP is currently offered to a broad set of counterparties; these counterparties make up a fairly large proportion of the lending community in overnight money markets. By offering this large group of counterparties an alternative, risk-free investment option, ON RRP should improve lenders’ market power and help keep money market rates near or above the ON RRP offered rate. Even if money markets were perfectly competitive, ON RRP would likely still be effective at supporting the floor provided by IOR, for example through addressing segmentation between secured and unsecured money markets. 18  The preservation of enough activity in the federal funds market to maintain the viability of the effective federal funds rate was one component of this. 19  A final operational change to improve the transmission of IOR into market rates was a revision to the interest calculation methodology that became effective in July 2015. As originally implemented, interest on excess reserves (IOER) was paid on each bank’s average balances over a two-week maintenance period, at the average interest rate.
44  In September 2014, money market rates were soft for several days going into quarter-end, as market participants anticipated that the ON RRP would reach its aggregate capacity on that day. According to market participants, money market lenders lent overnight funds well in advance of quarter-end at rates below the ON RRP rate to informally secure balance sheet capacity for the quarter-end date. 45  The foreign repo pool is authorized each year by the FOMC. For more background information about the foreign repo pool, see “Services for Central Banks and International Institutions.”  46  Other major central banks provide analogous services. In managing the foreign reserves of the United States, the Federal Reserve avails itself of these services when appropriate. 47  As a result, the rate paid on the pool closely tracked the interest rate achieved on temporary open market operations. BIS central bankers’ speeches  13  48  We are also monitoring developments in money fund net yields versus retail bank deposit rates. Money fund management fees declined considerably as interest rates fell to near-zero levels, apparently as fund managers worked to preserve a non-negative yield for their investors. Net interest margins at banks were also compressed. It is natural to expect that this compression in margins, both at money funds and at banks, will reverse as rates move away from zero, but the magnitude and timing of this reversal in margin compression may vary among these two investment types.