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The SOFR and the Fed’s influence over market interest rates

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  • Indriawan, Ivan
  • Jiao, Feng
  • Tse, Yiuman

Abstract

The secured overnight financing rate (SOFR) is the successor to LIBOR (London interbank offered rate) as a benchmark rate for lending in US dollars. Our results show that the SOFR aligns with the Federal Reserve’s policy target more closely than LIBOR. In addition, short-term market rates are more responsive to the SOFR than to LIBOR. Our findings highlight the advantages of the new benchmark rate over its predecessor.

Suggested Citation

  • Indriawan, Ivan & Jiao, Feng & Tse, Yiuman, 2021. "The SOFR and the Fed’s influence over market interest rates," Economics Letters, Elsevier, vol. 209(C).
    • Handle: RePEc:eee:ecolet:v:209:y:2021:i:c:s0165176521003724
    DOI: 10.1016/j.econlet.2021.110095
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    References listed on IDEAS

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    1. Erik Heitfield & Yang-Ho Park, 2019. "Inferring Term Rates from SOFR Futures Prices," Finance and Economics Discussion Series 2019-014, Board of Governors of the Federal Reserve System (U.S.).
    2. Andreas Schrimpf & Vladyslav Sushko, 2019. "Beyond LIBOR: a primer on the new benchmark rates," BIS Quarterly Review, Bank for International Settlements, March.
    3. Eugene F. Fama, 2013. "Does the Fed Control Interest Rates?," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 3(2), pages 180-199.
    4. Jane E. Ihrig & Scott A. Wolla, 2020. "Closing the Monetary Policy Curriculum Gap: A Primer for Educators Making the Transition to Teaching the Fed's Ample-Reserves Framework," FEDS Notes 2020-10-23-2, Board of Governors of the Federal Reserve System (U.S.).
    5. Fassas, Athanasios P., 2021. "Price discovery in US money market benchmarks: LIBOR vs. SOFR," Economics Letters, Elsevier, vol. 204(C).
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    Cited by:

    1. Indriawan, Ivan & Jiao, Feng & Tse, Yiuman, 2022. "Price discovery between forward-looking SOFR and LIBOR," Finance Research Letters, Elsevier, vol. 47(PB).

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    More about this item

    Keywords

    LIBOR; SOFR; Target fed funds rate;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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