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LIBOR Replacement Must Factor in Fed's Influence Over SOFR

Jeffrey Armstrong

September 9, 2021

Jeffrey Armstrong discusses how the US Federal Reserve’s interest rate management tools effectively impose a rate cap and rate floor on the Secured Overnight Financing Rate (SOFR).

US bank officials are moving ahead with purging the US dollar LIBOR (London Inter-Bank Offered Rate) benchmark from financial markets. At the same time, the Fed has been conducting aggressive monetary operations to manage short-term interest rates and control inflation. While the Fed’s monetary policy may not seem directly related to the transition from LIBOR, the replacement benchmark, SOFR, now falls within the scope of the Fed’s interest rate management operations.

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Jeffrey S. Armstrong

Director

Washington, DC