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The key benchmark that the Federal Reserve targets to control monetary policy dropped to its lowest level in more than a year on the final day of April, raising further questions about whether the central bank might need to tinker with some of the tools it uses to control it.

The effective fed funds rate, which the central bank is currently aiming to keep within a range of 0% to 0.25%, slipped by one basis point to 0.05% on Friday, the monetary authority said Monday. That followed a one-basis-point decline the day before that was the first dip since last quarter.

While officials chose not to shift the Fed’s administered rates at Wednesday’s policy meeting, a persistently lower rate raises the chance of tweaks to the interest on excess reserves rate, and the rate for the the central bank’s reverse repurchase agreement facility. The latest drop may be related to end-of-month effects, increasing scrutiny on the next reading to gauge whether it’s just a temporary dip.

“A one-day dip to 0.05% would probably not be enough to prompt an intermeeting rate tweak by the Fed,” Wrightson ICAP economist Lou Crandall wrote in a note before the data was released. If it were to stay at that level though, Crandall believes the Fed “would probably move promptly” to adjust the IOER and the rate for the Fed’s reverse repurchase agreement facility, while keeping the main target range unchanged.

Officials from the central bank, including Chair Jerome Powell and the New York Fed’s Lorie Logan, have said in recent months that they are open to adjusting administered rates as needed.

It will be “crucial to see if this level sustains,” according to Morgan Stanley’s Kelcie Gerson, who expects the fed funds rate to return back to at least six basis points.

Any rate adjustments looks premature, and the Fed would only seriously discuss raising these rates “once EFFR remains below five basis points, if fed funds volumes fall substantially, if Treasury bills begin trading negative, or if substantially more SOFR volumes trade negative,” Gerson wrote in a note.

Below Zero

For others, the latest decline has only reinforced expectations for an increase. Strategists at TD Securities note that after the recent move lower, they now expect the Fed to raise IOER by five basis points at or before the June policy meeting.

Rates for short-term dollar borrowing have been driven to zero and below, weighed down by Fed asset purchases, a drawdown of the U.S. Treasury’s mammoth cash pile that’s cutting into the supply of T-bills, and a shift from bank deposits to money-market funds.

The potential reimposition of America’s debt ceiling later this year threatens to exacerbate this dynamic. Last week saw the government sell bills at a zero yield for the first time since early 2020.