Timely links to external news and articles, usually valuation related, with occasional commentary.
When the Fed announces a higher target range for the federal-funds rate (currently 1.5% to 1.75%), it implements its decision by raising what it pays both on reserve balances (currently 1.65%) and on reverse repurchase agreements (currently 1.55%). Money to pay for these interest expenses comes out of the Fed’s interest earnings on its own portfolio.
The tricky situation the Fed now faces is that its own net interest income—$116.8 billion in 2021, of which 93% was remitted to the Treasury—will soon be exhausted by the higher interest rates it intends to pay on those combined cash funds. A target federal-funds range of 3.25% to 3.5% by year-end would have the Fed shelling out more than $195 billion annually to maintain both reserves and reverse repurchase agreements at current levels. The Treasury will have to advance funds to cover the gap.