The SOFR and the Fed’s influence over market interest rates

The secured overnight financing rate (SOFR) is the successor to LIBOR (London interbank offered rate) as a benchmark rate for lending in US dollars. Our results show that the SOFR aligns with the Federal Reserve’s policy target more closely than LIBOR. In addition, short-term market rates are more responsive to the SOFR than to LIBOR. Our findings highlight the advantages of the new benchmark rate over its predecessor. •The SOFR aligns with the Federal Reserve’s policy target more closely than LIBOR.•Short-term market rates are more responsive to the SOFR than to LIBOR.•Our findings highlight the advantages of the new benchmark rate over LIBOR.