Low U.S. Short-Term Rates Likely A Fixture In 2021 Amid Excess Cash

• Excess liquidity in the short-term U.S. lending market recently knocked overnight interest rates to almost zero, and risks pushing the federal funds rate into negative territory, a scenario that could cause disruptions in money markets.
• The fed funds rate is the rate banks charge each other for overnight loans to meet reserves required by the Federal Reserve.
• A sub-zero effective fed funds rate would imply that banks are willing to pay to lend funds to each other, and indicate the market expects the Fed to take interest rates below zero. Even if negative rates are a long shot, analysts said low short-term rates are not ideal either as they suggest a potentially deflationary environment.
• That being said, the Fed has tools to lift short-term rates, such as raising the rate it pays banks for excess reserves parked at the central bank. The so-called IOER (interest on excess reserves) rate also influences the fed funds target. Analysts said if the fed funds rate falls below 0.05% for consecutive sessions, a Fed response is likely to follow.

(Source: Reuters)