Two Episodes, Two Signals: 2019 and 2023

This chapter tests the EFFR–BFFR distinction against two documented episodes: September 2019 and March 2023. The focus is not to crown one rate as the “real” federal funds rate, but to compare what each rate was showing about its own funding population, how reserve conditions fit the comparison, and what can responsibly be meant by “funding stress” in the smaller-bank channel.

September 2019: an aggregate disturbance without the same BFFR response

September 17, 2019 is widely associated with a sharp spike in repo rates and a brief move of the EFFR above the Federal Reserve’s target range. If one assumes that every overnight funding market shares the same reserve conditions, the episode appears to create a puzzle: why would a disturbance visible in a prominent short-term rate not produce the same movement in the rate associated with bankers’ banks?

The answer supported by the Federal Reserve note is that the two rates were observing different parts of the system. The BFFR showed little movement. Bankers’ banks and their clients did not appear to face comparable liquidity constraints, and the note interprets that behavior as evidence that reserves remained ample among those institutions. In other words, the event registered in the broader short-term funding environment without passing through in the same way to the bankers’ bank network.

That conclusion is deliberately narrower than saying that smaller banks were unaffected. The BFFR is built from a particular set of overnight transactions. A bank outside that channel, or a bank whose stress appeared in another form, would not necessarily move the indicator. Even within the channel, “little movement” means that the observed pricing of bankers’ bank lending did not show a comparable tightening; it does not provide a complete account of every member’s internal liquidity position.

The episode therefore separates three claims that are often collapsed into one. First, EFFR can react to conditions in the broader short-term market. Second, BFFR can remain comparatively steady when bankers’ banks and their observed clients do not experience the same pressure. Third, the divergence itself is information: it suggests that liquidity conditions were distributed unevenly rather than that one rate was simply erroneous.

The relevant comparison is also about reference points, not just levels. EFFR was notable because it moved relative to the Federal Reserve’s target range. BFFR was informative because it did not show the corresponding movement in the bankers’ bank segment. The question was not whether BFFR was “low” in an absolute sense. It was whether the rate and its associated borrowers were displaying a change in marginal funding conditions. On the evidence summarized by the note, they were not displaying the same change.

This is what a segmented diagnostic contributes. An aggregate disturbance can be important without being universal.