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Month-End Fed Funds Rate Dips and Bank Balance-Sheet Reporting

Article Quant Q&A · Author: MikeRand
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Summary

The document explains why the effective federal funds rate may dip at month-end as well as quarter-end. Its proposed mechanism is that foreign banks face balance-sheet reporting snapshots at month-end, while US banks use daily averages. Foreign banks may therefore reduce their borrowing in the fed-funds market around reporting dates, leaving lenders to offer funds at lower rates.

The practical point for someone forecasting rates with fed-funds futures is to consider whether a recurring reporting-date effect is distorting observed overnight rates, rather than treating every month-end dip as a lasting change in policy expectations. The answer suggests excluding this effect from the study, but provides no data, formal analysis, or method for quantifying it. The explanation is a brief answer from a forum and should be treated as a proposed market-microstructure explanation, not established evidence that the effect applies uniformly across periods or institutions.

Key ideas

  • Month-end balance-sheet reporting can affect banks’ incentives to borrow in the fed-funds market.
  • The answer attributes month-end rate dips to foreign banks reducing borrowing around reporting snapshots.
  • Reduced borrowing may leave lenders willing to lend at lower rates.
  • Rate forecasts based on fed-funds futures may need to account for recurring reporting-date effects.
  • The document offers no empirical test or method for measuring the proposed effect.

Tags

Fixed incomeFuturesUS marketsMarket microstructure
Full text
# Fed Funds Rate - why has it just started decreasing on the final day of each month (vs quarter)


# Fed Funds Rate - why has it just started decreasing on the final day of each month (vs quarter)












I understand why the Fed Funds rate has historically dropped on the final day of each quarter, but in 2015 it appears that the effective Fed Funds rate now drops on the final day of each month as well. Is there a technical reason why this is happening?

Using the Fed Funds Futures to forecast future Fed Funds rates and want to make sure I incorporate this nuance (as I assume it's being priced into the futures).

## Answer by Deepak KS (score 5, accepted)

https://quant.stackexchange.com/a/29937

This is due to the banking regulations that came couple of years back requiring foreign banks to calculate their balance sheet snapshots at the end of every month as compared to US Banks who takes the daily average. As a result, many foreign banks stay away from fed-funds market to show they are borrowing less. This forces the lenders to lend the money at cheaper rates. So, for the purpose of your study (I know its way too late)you can actually assume this glitch doesn't occur.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.