What banks charge each other to borrow dollars for three months fell to its lowest level in over six months on Thursday in the wake of the Federal Reserve's decision to lower the interest it pays banks on excess reserves in a bid to stabilize money market conditions. The three-month London interbank offered rate declined to 2.56513%, which was the lowest since October 31.
LIBOR is the benchmark rate for $200 trillion worth of dollar-denominated financial products, mainly interest rate swaps and floating-rate loans. On Wednesday, the Fed as expected left its target range on short-term borrowing costs unchanged at 2.25-2.50%. It also trimmed the amount of interest it pays banks on excess reserves (IOER) to 2.35% from 2.40% in an effort to ensure its key overnight lending rate, the federal funds rate, remains within the current target band.
The fed funds rate is the amount banks charge each other to borrow reserves overnight, and is the rate the US central bank targets as its main way of controlling other borrowing costs in the economy. The rate has been approaching the upper end of the target range in recent weeks, prompting an adjustment in the IOER for the first time without the Fed changing its overall rate regime. On Monday, the average or effective, fed funds rate's premium above IOER increased to a record 5 basis points.