Key short-term interest rates jumped early on Thursday as international markets calmly responded to the U.S. Federal Reserve's first policy tightening in nearly a decade, a welcome sign for the Fed as it prepares for a tricky auction later in the day.
Libor, a global rate benchmark for $350 trillion worth of securities and loans, booked its biggest single-day rise since May 2010. Moves in the Treasury market were modest, while the dollar rose as expected, and world stocks broadly applauded the well-telegraphed move by the U.S. central bank.
"The Fed has to be patting themselves on the back given what's happened in markets," said Andrew Szczurowski, portfolio manager at Eaton Vance, in Boston. "With all of their transparency they managed to pull any volatility forward (before the hike), so I'd say it's a success."
The world's most influential central bank decided on Wednesday to raise its key policy rate modestly to a new range of 0.25 to 0.5%, in a nod to U.S. labor market strength. The heavy lifting comes on Thursday as the Fed uses new tools to pry borrowing costs off the floor.
To ensure rates rise as high as desired, Fed policymakers aggressively expanded a so-called overnight reverse repurchase program, or ON RRP, effectively ditching a cap on the facility and saying they expect some $2 trillion in bids during an auction to be held between 12:45 and 13:15 Eastern (1745-1815 GMT).
The reverse repo facility was previously capped at $300 billion. Analysts had expected the Fed to about double it.
"It's clear the Fed is going to do what ever it takes," said Szczurowski.
The reverse repo rate will be 0.25%, up from 0.05%, and serve as the "floor" to the new target policy range. A rate the Fed pays primary dealers on excess reserves, also a relatively new tool, will serve as the "ceiling" at 0.5%.
The Libor measure of interbank borrowing costs has risen more than 0.20 percentage point since November as investors anticipated the U.S. rate hike, as well as on reduced lending into year-end.
Also on Thursday, rate futures markets slipped as traders expected the Fed would follow up with another rate increase by mid-2016.