Discussion Paper
Explaining the Puzzling Behavior of Short-Term Money Market Rates
Abstract: Since 2008, the Federal Reserve has dramatically increased the supply of bank reserves, effectively adopting a floor system for monetary policy implementation. Since then, the behavior of short-term money market rates has been at times puzzling. In particular, short-term rates have been surprisingly firm in recent months, despite the large increase in reserves by the Fed as a part of its response to the coronavirus pandemic. In this post, we provide evidence that both the supply of reserves and the supply of short-term Treasury securities are important factors for explaining short-term rates.
Keywords: Fed Funds; Treasury; Federal Reserve; liquidity;
JEL Classification: E5; E4; G12;
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Bibliographic Information
Provider: Federal Reserve Bank of New York
Part of Series: Liberty Street Economics
Publication Date: 2020-08-24
Number: 20200824