US fed funds rate hit highest since April 2013

[NEW YORK] A key overnight borrowing cost for US banks reached its highest level since April 2013 on Monday after the Federal Reserve raised an interest rate on a test program aimed to hit its rate target when it decides to tighten policy, Fed data showed.

The effective or average interest rate on federal funds, or the cost for banks to borrow excess reserves from each other, was 0.13 per cent, up from 0.08 per cent on Friday.

The fed funds rate traded in a range of 0.05 per cent to 0.3125 per cent on Monday, according to the Fed.

On Monday, the US central bank raised the interest rate it pays Wall Street dealers, money market mutual funds and mortgage finance agencies to borrow its Treasuries holdings.

It set the interest rate on reverse repurchase agreements at 0.10 per cent on Monday, up from 0.07 per cent on Friday.

These reverse repos are designed to drain cash from the banking system in a bid to keep the fed funds rate at the level which the central bank targets.

The Fed adopted a fed funds target of 0.00-0.25 per cent in Dec. 2008 at the height of the global credit crisis.

REUTERS