Allen, Kyle D. and Griffiths, Mark D. and Hein, Scott E. and Winters, Drew B., Why Is the Effective Fed Funds Rate So Low? (April 16, 2014). Available at SSRN: http://ssrn.com/abstract=2425913

“Since December 18, 2008 when the Federal Reserve began paying 25 basis points (bps) on depository institution’s reserves, the effective federal funds rate has stayed well below 25 bps, on occasion by as much as fifteen bps. This suggests the possibility of an arbitrage opportunity. The purpose of this paper is to offer an explanation of this ongoing situation. Part of the explanation starts with the recognition that certain financial participants in the federal funds market cannot earn the 25 bps. This paper further explains other limits to arbitrage arguing that the anomaly persists, in part, due to costs associated with the Federal Deposit Insurance Corporation (FDIC) assessment on the liabilities of depository institutions and capital charges. The difference in these two interest rates also is found to increase with the Federal Reserve’s bank reserve creation associated with the quantitative easing programs.”