Dec 5 (Reuters) - A key measure of what banks charge each other to borrow dollars for three months rose on Wednesday following its biggest daily drop since August the day before in the wake of market turbulence tied to fears about slowing global growth.
The London interbank offered rate (LIBOR) to borrow three-month dollars climbed almost 2.7 basis points to 2.76575 percent, the highest level in more than a decade.
The “effective” or average rate on federal funds, what banks charge each other to borrow excess reserves overnight, returned to 2.20 percent on Tuesday after dipping to 2.19 percent the previous day, according to New York Federal Reserve data released on Wednesday.
In addition to expectations of further Fed rate increases, three-month LIBOR has increased and the effective fed funds rate has been elevated on rising U.S. government borrowing and a shrinking Federal Reserve balance sheet.
LIBOR is the benchmark rate for $200 trillion of dollar-denominated financial products, mainly interest rate swaps and floating-rate loans.
Fed policymakers are expected to raise the target range on key lending rates by a quarter point to 2.25-2.50 percent at a two-day meeting on Dec. 18-19, marking their fourth rate increase in 2018.
The effective fed funds rate moved back to parity with what the Fed pays banks on the excess reserves they leave with the central bank (IOER).
Fed funds volume on Tuesday declined to $78 billion from $83 billion, which was the highest level in four months, New York Fed data showed.
There have been concerns that the fed funds rate would rise above IOER and possibly the top end of the Fed’s target range, which may raise worries about whether Fed policymakers are losing their grip on monetary policy.
The Fed hinted it may make a second adjustment to the IOER in six months at its upcoming two-day meeting.
Reporting by Richard Leong; editing by Jonathan Oatis