"We learned a little bit more about the Fed’s intention on exit strategies in this week’s minutes. As expected, the Fed is leaning towards IOER as the main policy rate and the RRP playing a supporting role. The Fed plans to set the RRP rate "at or above 20bps" below IOER. Interestingly though, most participants also felt the Fed Funds Effective rate should also be examined and the calculation should be amended to obtain a more "robust measure of overnight bank funding rates." Which was an odd reference because we’ve learned post-crisis that setting the IOER rate doesn’t control the Fed effective rate. Mainly because GSE’s and a few non-bank institutions do not receive interest on their reserve balances. Incentivizing these counterparties to lend in the Fed funds mkt at rates well below IOER and widening the IOER/FFeff spd. GSEs now account for a vast majority of lending into the fed funds market. It wasn’t initially clear to me why the Fed was focused on the Fed effective calculation in the mins though. But after a little research, and seeing Lockhart’s comments today, it certainly makes more sense. The federal funds rate, is currently calculated on the basis of "brokered trades" of overnight loans of reserves between banks. However, this excludes "direct trades" and "eurodollar transactions" which is anything outside of the broker platform. Fed Funds are not traded on our desk but I would guess that meant a large portion of the overnight lending activity was not currently being captured in the effective calculation. "The Fed has already started collecting this data from 165 domestic banks and U.S. branches of foreign banks since 4/1st." Hard to tell what kind of an impact this will have on lending rates but it definitely makes sense that the setting should include all trades, something that needs to be fixed before official exit strategies are determined."