FOMC Preview: IOER

To me, this is the real question mark. The market is estimating about a 30% chance the Fed cuts Interest on Excess Reserves from 0.25% to 0.10%/0.15%.

This is a risk. Talks is that it will bring down short-term rates but with 12-month bills at 0.08% and two-month bills at almost zero, the impact is questionable.

For FX, this is important because it has the most effect on USD/JPY. If the IOER is taken down, Japanese may no longer get a benefit from holding USD.

The risk is that there could be unintended consequences. PIMCO and others warned of this yesterday and it could mean problems in money market funds, fed fund futures and other short-term markets.

The trade is pretty straightforward to sell USD/JPY if this is cut. Since this is priced in, to some extent, USD/JPY will bump higher if this isn't announced.