After the Federal Reserve raised its benchmark interest rate forthe first time in almost a decade, the Day One follow-through inmoney markets shows the policy move looks to be working.

The overnight U.S. dollar London interbank-offered rate, knownas Libor, fixed at the highest in more than six years Thursday. Therate, which signals where banks think they can borrow from eachother, was posted by Intercontinental Exchange Inc. at 6:45 a.m. inNew York at 0.3614 percent, the highest since March 31, 2009. It'sup from 0.1315 percent a week earlier and 0.0852 percent at the endof last year.

In the lead-up to the Fed decision, investors voiced skepticismthat policy makers would be able to push rates as high as intended,because officials are using a new set of tools to engineer themove. One key question was whether the central bank would expandits reverse repo facility sufficiently to lift the floor for thefunds rate. The Fed allayed that concern Wednesday by removing acap on the program, which siphons excess cash from the system.

“The market is certainly on track” in responding to the Fed'spolicy, said Aaron Kohli, a fixed-income strategist in New York forBMO Capital Markets, one of 22 primary dealers that trade with theFed. “It looks like rates are moving fairly well. Broadly, the Fedshould be fairly effective in draining excess reserves, and thatshould put pressure on the front-end rates.”

The federal funds rate opened Thursday at 0.35 percent, comparedwith the 0.14 percent open on Wednesday, according to ICAP Plc, theworld's largest inter-dealer broker. Funds traded between 0.08percent and 0.55 percent on Wednesday, according to data posted tothe New York Fed's website Thursday.

The FederalOpen Market Committee voted Wednesday to set the new target rangefor the federal funds rate at 0.25 percent to 0.5 percent, upfrom zero to 0.25 percent.

The general collateral Treasury repurchase-agreement rate, agauge of such transactions between dealers, traded at 0.47 percentat 8 a.m. in New York, up from the close Wednesday of 0.35 percent,according to ICAP. The average rate for all GCF repo on Wednesdaywas 0.4 percent, according to a Depository Trust and Clearing Corp.index.

In an overnight repo, borrowers take cash from counterpartiesand post securities as collateral, then unwind the trade the nextday. Repo rates have been climbing this week ahead of the start ofFed tightening and amid the normal yearend volatility in moneymarkets, as dealers shore up balance sheets.

The central bank on Wednesday increased the interest it pays onits overnight reverse repos, to 0.25 percent from 0.05 percent, toput a floor at the lower end of the range and removed the cap onthe aggregate size of the daily facility. It also raised theinterest it pays on excess reserves held at the Fed to 0.5 percentfrom 0.25 percent to mark the upper end of the range.

The Fed's willingness to boost its reverse-repo facility,previously capped at $300 billion per day, means all the operationswill come at the new fixed rate of 0.25 percent. The Fed conductsreverse repos with primary dealers and money-market mutualfunds.

The New York Fed drained $105 billion at a fixed rate of 0.25percent Thursday in the first reverse repo operation since theFed's announcement Wednesday. There were 49 bidders for the RRPs,as they are known. Wednesday, when the $300 billion cap stillexisted, the RRP tallied $102 billion at the prevailing rate of0.05 percent.

As the central bank's monetary policy contraction starts gearingup, traders will watch out for Friday morning, at about 8 a.m. NewYork time, when the first post-liftoff federal funds effective rateprint is published.

The effective rate is based on trades the previous day and isthe main rate the Fed is targeting. The central bank's plan is tohave it float now between 0.25 percent and 0.50 percent.

–With assistance from Matthew Boesler and James Holloway.

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