Why Investors Care
Sometimes, banks are scrambling to meet their required reserve amount on Wednesday. If banks are having problems meeting reserve requirements, the federal funds rate market will feel the brunt of it since the federal funds rate is the rate which banks charge each other for the use of overnight funds. Usually, small regional banks have more than ample funds, while large money center banks are the ones in need of the funds because they loan their funds more extensively. Most of the time, small regional banks will lend overnight funds to large money center banks. When there is little liquidity in the banking system, the federal funds rate can shoot up sharply on a reserve settlement Wednesday because the money center banks are willing to pay whatever it takes in order that their reserves are meeting the Fed's requirements. Oddly enough, liquidity trends can change over the course of the day. It isn't unusual to see the fed funds rate shoot up early in the day, but drop just as much near the end of the day. Consequently, since many short term rates are tied to the fed funds rate, short-term dated instruments such as 7-day CDs or even 30 and 60 day CDs can see their rates vary sharply on bank reserve settlement Wednesday. Incidentally, not having funds to meet reserve requirements is usually not the sign of a bank in financial trouble. However, it is a sign of poor reserve management on the part of the bank since it covers the prior two week's reserves.
Federal Reserve Board of Governors.
Every other Wednesday.
Not applicable. Event is a deadline for banks.
Every other week.