October 19, 2018 / 10:14 PM / a month ago

UPDATE 1-U.S. fed funds rate remained elevated on Thursday

(Adds background, comment from Fed’s Kaplan)

NEW YORK, Oct 19 (Reuters) - The U.S. federal funds rate remained elevated on Thursday in a massive sell-off in money markets, where borrowing costs spiked on concerns about more interest rate increases from the Federal Reserve, New York Federal Reserve data released on Friday showed.

The effective or average fed funds rate, or what U.S. banks charge each other to borrow excess reserves overnight, was 2.19 percent based on $54 billion worth of trades on Thursday. They matched the levels seen on Wednesday.

The spread between fed funds rate and the interest the Fed pays banks on excess reserves it leaves with the U.S. central bank (IOER) remained at 0.01 percentage point for a second day.

That is the tightest ever margin between the two rates, which the Fed targets to conduct its monetary policy.

Some analysts have raised concerns if the average fed funds rate breaks above IOER, the Fed would be seen losing its grip on controlling short-term borrowing costs.

Analysts have blamed the shrinkage in the rate spread on the surge in Treasury bill supply and the Fed’s paring of its bond holdings. The two factors have reduced the amount of excess reserves for lending between banks, keeping fed funds rate elevated.

The Fed in the minutes on its Sept. 25-26 policy meeting suggested policy makers are not overly concerned about the tight rate spread.

While Fed officials are monitoring this situation, the small rate gap between fed funds and IOER stems from “technical” issues and is not a tightening of financial conditions, which would hamper business activity and overall economic growth, Dallas Federal Reserve President Robert Kaplan said on Friday.

Kaplan was responding to a question from reporters after an event sponsored by the Manhattan Institute in New York.

Reporting by Richard Leong Editing by Tom Brown

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