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For the Fed, voting to hike interest rates is the easy part. The tough work begins as U.S. central bank officials implement the right maneuvers to ensure rates go where they want.
Essentially, the heavy lifting gets assigned to bond traders at the New York Fed who use a few tools to ensure that supply and demand work out so that the primary policy target, or funds rate, is within the range the Federal Open Market Committee expects.
If things go as Wall Street expects, the Fed will be lifting the current funds rate target from 0 to 0.25 percent to 0.25 to 0.50 percent — a number that the investors will see as a quarter-point hike, though the mechanics may not quite work out that way.
Specifically, the Fed will be using two tools: interest on excess reserves, or IOER, and reverse repurchase operations, or RRP. The former involves payments on the $2.3 trillion or so of excess reserves banks currently hold at the Fed, while the latter are short-term — almost always overnight — purchases of a security with the agreement to sell later at a higher price.
How it all works is that the New York Fed's trading desk gets its cue for what the overnight funds rate target is, then uses the IOER and RRP "such that the aggregate supply of banking reserves roughly matched prevailing reserve demand," Elad Pashtan, U.S. economist at Goldman Sachs, said in a recent report for clients explaining the process.