The premium that lenders get in overnight private-market repos, relative to the amount the Fed pays lenders pouring cash into its overnight repo facility, shrank to an average of 0.04 percentage point in the three weeks ended Dec. 8.
That is below the 0.17-point average for 2016, according to data from the Fed and Depository Trust & Clearing Corp. So far in December, the average premium is at its lowest point in at least two years. The gap widened slightly Friday and Monday.
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The abundance of cash sloshing around the money market could limit the impact of any Fed rate increase because it could drag down related rates that are supposed to move in line with the official federal-funds rate, creating a fresh challenge for a central bank that likes all market rates to follow its lead.
Distortions in interest rates could pose a conundrum for the Fed, because there are no guarantees that its policy maneuvers will be transmitted to all parts of the economy when the system is so awash in cash after the 2008 financial crisis. It isn’t clear if the pattern could moderate or worsen when the Fed continues to move rates further away from zero.
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