Fed’s Tools Showing Signs of Stress Against the Cash Onslaught

The deluge of cash in the short-end is threatening to create fissures in the Federal Reserve’s key rates corridor, increasing chances policy makers will be forced to adjust their tools to defend the floor.

The effective fed funds rate remains at 0.06%, within the Fed’s 0% to 0.25% target range, anchored by the offering yield on the Fed’s facility for overnight reverse repurchase agreements. While the operation has been draining reserves from the system, there’s a risk that money-market funds — the primary counterparties — will eventually demand higher yields to handle the surge in…