Commentary
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Overnight Rates, SOFR and Why the Cost of Cash Matters
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Draft commentary, awaiting the publisher. The price of overnight borrowing is the base on which every other interest rate is built.
Every night, banks and funds lend each other cash against safe collateral. The New York Fed publishes the rates on those loans. Its latest stored print for the secured overnight financing rate is 3.89%, and for the effective federal funds rate, 3.88%. They differ a little and they move together.
The claim
Overnight money is a price like any other, and it is the base of the whole rate structure. Longer rates are, in large part, expectations about where this one goes. A central bank that anchors the overnight rate firmly anchors much else.
The point of watching the gap between the secured and unsecured overnight rates is that it shows strain. If cash gets scarce, the secured rate climbs against the policy rate. That is the market talking.
The strongest case against
Small gaps are noise. Month ends, tax dates and Treasury settlement days push overnight rates around for reasons that mean little. Reading a crisis into a single wide print is how commentators embarrass themselves.
Why the claim still holds
Noise is not the same as nothing. The right habit is to look at the pattern, not the day. A stable, tight band says the plumbing works. A band that keeps widening says the bank should explain what it plans to do.
That is also the argument for a rule. If the bank states how it keeps the overnight rate in its range, and how it will respond when the band slips, then a wide print is a test of the promise. Without that, every wobble sends traders back to guessing.
This is the paper’s opinion. It predicts no decision and is not a finding of the Federal Reserve or the New York Fed.