The drama is in what happens afterwards
The $2.5 trillion in excess reserves at the Fed is the issue. That money will be competing for the highest rates and could drive down the overnight.
I wrote extensively about what to watch at the time of the Sept meeting.
Bloomberg outlines some things to watch:
- The Libor fix at 6:45 am ET on Thursday
- Repo rates, which will begin to update at 8 am ET
- 9:30 am ET, rates on commercial paper
- 1:15 pm ET, the NY Fed announces the results of its first overnight reverse repo
The Fed has been testing the overnight reverse repo program for two years and believes they can boost rates to at least 0.25% for all the excess reserves. Along with the Fed decision tomorrow, they could boost the daily cap on the program to $500 billion/day from $300 billion or could make it unlimited.
"It's been testing the facility with a cap on transactions of $300 billion per day. Over the last two years, in testing, the Fed has borrowed $114 billion each day on average. The cap was breached on Sept. 30, 2014 due to outsize demand for liquidity on the last day of the quarter. Investors offered to lend the Fed $407.2 billion at rates as low as minus 0.2 percent.
The fifth event to watch is at 8 am ET on Friday when the first post-hike Fed funds effective rate is announced. The target will be between 0.25% to 0.50% and every basis point in between will matter. Anything below (or maybe even close to) 0.25% will cause turmoil in markets.