Month-End Federal Funds Rate Dips and Their Possible Drivers
Summary
The document describes a reported pattern of month-end declines in the Effective Federal Funds Rate and asks why it weakened from mid-2018 through mid-2021 before appearing again. It presents bank balance-sheet window dressing to improve reported liquidity coverage ratios as one proposed explanation: reduced borrowing at month end could lower loan demand and place downward pressure on rates. It also raises a claim about differences in reporting frequency between foreign and U.S. banks.
The author observes that the pattern appears alongside changes in the spread between the EFFR and interest on reserve balances. Dips seem more evident in easier monetary conditions, when banks borrow in the federal funds market, and less evident when conditions are tighter and banks lend. The document frames this as an observed association, not established causation, and does not resolve the regulatory or structural reasons for the interval when the pattern faded. Its evidence is descriptive and refers to rate data and prior studies rather than presenting a formal test.
Key ideas
- Month-end EFFR declines are discussed as a recurring pattern that weakened for a period and later appeared to return.
- Bank window dressing to improve reported liquidity coverage is offered as a possible mechanism affecting month-end borrowing demand.
- The author notes an association between the pattern and the EFFR–IORB spread, while leaving causality unresolved.
- The discussion raises, but does not verify, differences in reporting frequency between foreign and U.S. banks.
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Full text
# Why did the month-end (ir)regularities in Effective Federal Funds Rate (EFFR) disappear in 2018? # Why did the month-end (ir)regularities in Effective Federal Funds Rate (EFFR) disappear in 2018? The Federal Funds rate has exhibited regular drops at month ends since beginning of 2015. (Source: FRED https://fred.stlouisfed.org/series/EFFR) Some studies (e.g., https://www.mdpi.com/1911-8074/14/5/204/pdf) have pointed to window dressing by banks to boost their LCR in month-end reporting as reasons for this curious phenomenon. Specifically, banks who wishes to improve their LCR on the last day of the month would decrease borrowing in the Federal Funds market. This reduces demand for loans, and pushes the interest rates down. However, it appears that the pattern largely disappeared from mid 2018 to mid 2021, and is only recently making a comeback (see fig below zoomed in on 2021). My question is: why did the the pattern disappear during this period? Were there any regulatory changes? Or was it due to some other market structural changes? Bonus question: I have also found this SE question (Fed Funds Rate - why has it just started decreasing on the final day of each month (vs quarter)) from 2015, with an answer suggesting further that only foreign banks report monthly, while US banks report daily. Are there any official regulatory documents backing this claim (regarding the frequency of reporting)? Any and all comments/insights are appreciated! Edit/update: I had some thoughts on why dips appear shortly after I posted this question (but didn't write them down here!). It seems that dips are related to the tightness in monetary conditions, as evidenced by the EFFR-IORB spread: Specifically, in easy monetary environments ((foreign) banks borrow from the FF market at EFFR below IORB, deposit into FED account earning IORB) the month-end dips show up. On the other hand, when monetary conditions are tight (banks lend into the FF market, EFFR above IORB), the month-end dips no longer exists. I don't know if the relationship is causal, or if so, the underlying mechanisms. But this seems to be an interesting correlation I have to think about..
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.