The FOMC is holding its next regular policy meeting next week. It is widely expected that on December 13 the Federal Reserve’s policy body will vote and publicize the next “rate hike” in its exit strategy. Starting in December 2015, this next one, if it happens, will be the fifth in the series.

It would bring the IOER “ceiling” (or the first of the double floor, as some policymakers try to call it for making it sound like IOER hasn’t been a complete failure from the very start) to 1.50%. In all likelihood the RRP “floor” floor will be raised to 1.25%.

Money market rates typically adjust in anticipation, which is what all central bankers including those in the US wish to see. These adjustments are telegraphed well in advance so the risk of a shock-related disruption is small. Money markets function often as perfect or nearly perfect substitutes, though not always. A cash owner can easily trade between the RRP and treasury bills with little or no change in risk.

Prior to the “hike” in June 2017, the 3-month T-bill rate, for example, had been moving upward since about the end of April. As now, it was expected ahead of time that the June meeting would mark the next policy move. By the time the FOMC did vote for one on June 14, the 3-month equivalent bill yield had been trading for more than a week around and above the 100 bps the RRP was afterward moved up to.

The 4-week bill yield, however, was another matter entirely. It had been consistently in violation trading below the RRP “floor”, thus requiring for the reverse repo always the quotation marks, and in the weeks leading up to June 14 got only about halfway between the then-active “floor” (75 bps) and what was anticipated to be the next one (100 bps). Any time any bill rate, including the 3-month instrument, gets below the RRP it can only be due to collateral considerations (tightening or shortage).

In moving closer to a December “hike”, the June pattern is actively being repeated. The 3-month bill yield has been above 125 bps (the next “floor”) since mid- November. The 4-week is instead once again only halfway there with just a little over a week to go.