Predictably, all eyes will be on the FOMC meeting this evening. Expect a 25bps in the target federal funds rate. That should translate to a 25bps cut in the actual policy rate, the Interest on Excess Reserves Rate (IOER). However, given the strains in repo markets, which have spilled over into the fed funds market, Powell & Co could be inclined to cut the IOER rate by more than 25bps. The reasoning here is that a bigger cut in IOER should boost arbitrage from the unsecured fed funds market (which is primarily interbank) to the repo market. After all, there is still $1.3 trillion or so in excess liquidity sloshing around in the fed funds market. Banks that aren’t balance sheet constrained should borrow in the fed funds market and lend in the repo market.

For the full report, click HERE