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Working Paper
Monetary Policy 101: A Primer on the Fed's Changing Approach to Policy Implementation
The Federal Reserve conducts monetary policy in order to achieve its statutory mandate of maximum employment, stable prices, and moderate long-term interest rates as prescribed by the Congress and laid out in the Federal Reserve Act. For many years prior to the financial crisis, the FOMC set a target for the federal funds rate and achieved that target through purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve's large scale ...
Working Paper
Analyzing Federal Reserve asset purchases: from whom does the Fed buy?
Asset purchases have become an important monetary policy tool of the Federal Reserve in recent years. To date, most studies of the Federal Reserve's asset purchases have tried to measure the interest rate effects of the policies. Several papers provide evidence that these programs do have important effects on longer-term market interest rates. The theory of how asset purchases work, however, is less well developed. Some of the empirical studies point to "preferred habitat" models in which investors do not have the same objectives, and therefore prefer to hold different types and maturities ...
Working Paper
How Have Banks Been Managing the Composition of High-Quality Liquid Assets?
We study banks' post-crisis liquidity management. We construct time series of U.S. banks' holdings of high-quality liquid assets (HQLA) and examine how these assets have been managed in recent years to comply with the Liquidity Coverage Ratio (LCR) requirement. We find that, in becoming LCR compliant, banks initially ramped up their stock of reserve balances. However, once the requirement was met, some banks subsequently shifted the compositions of their liquid portfolios significantly. This raises the question: What drives the compositions of banks? HQLA? We show that a risk-return framework ...
Working Paper
The Federal Reserve's Portfolio and its Effect on Interest Rates
We explore the historical composition of the Federal Reserve's Treasury portfolio and its effect on Treasury yields. Using data from 1985 to 2016, we show that the divergence of the composition of the Federal Reserve's portfolio from overall Treasury securities outstanding is associated with a statistically significant effect on interest rates. In aggregate, when the Federal Reserve's portfolio has shorter maturity than overall Treasury debt outstanding, measures of the term premium are higher at all horizons; likewise, when the Federal Reserve's portfolio has longer maturity, term premiums ...
Working Paper
Expectations about the Federal Reserve's balance sheet and the term structure of interest rates
This paper provides a systematic assessment of the effect of the Federal Reserve's asset purchase programs on Treasury yields, with particular emphasis on the role of market expectations about the evolution of the Federal Reserve's balance sheet and of interest rates on the impact of the programs. We construct measures of such market expectations based on Blue Chip survey forecasts, Congressional Budget Office projections, and information from formal FOMC communications. Those measures are combined with a no-arbitrage term structure model, in which yields are driven by current and expected ...
Working Paper
The Federal Reserve's balance sheet: a primer and projections
Over the past few years, the Federal Reserve's use of unconventional monetary policy tools has led it to hold a large portfolio of securities. The securities holdings in excess of historical norms have been shown to be putting downward pressure on longer-term interest rates. One question asked is how long this unusual amount of monetary policy accommodation will be in place. Here we provide projections of the evolution of the Federal Reserve's balance sheet that are consistent with public economic forecasts and announced Federal Open Market Committee policy principles to help answer this ...
Working Paper
How Does the Fed Adjust its Securities Holdings and Who is Affected?
The Federal Open Market Committee indicated in its September 2017 post-meeting statement that it will initiate in October a balance sheet normalization program to gradually reduce its securities holdings. This action will put in place a policy of reinvesting and redeeming portions of the principal payments received by the Federal Reserve from its holdings of Treasury and agency securities. How are these adjustments to the Federal Reserve?s securities holdings transacted and who is affected? This paper provides a primer regarding how the Federal Reserve accounts for these securities ...
Working Paper
The Federal Reserve's balance sheet and earnings: a primer and projections
Over the past few years, the Federal Reserve's use of unconventional monetary policy tools has led it to hold a large portfolio of securities. The asset purchases are intended to put downward pressure on longer-term interest rates, but also affect the Federal Reserve's balance sheet and income. We present a framework for projecting Federal Reserve assets and liabilities and income through time. The projections are based on public economic forecasts and announced Federal Open Market Committee policy principles. The projections imply that for the next several years, the Federal Reserve's ...
Working Paper
The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets
This paper develops a model of the financial system that provides a framework for analyzing monetary policy implementation in a world with multiple Federal Reserve liabilities and a superabundant supply of reserves. The analysis demonstrates that the Federal Reserve's suite of policy tools including interest on excess reserves (IOER), overnight and term reverse repurchase agreements, and term deposits should allow the Federal Reserve to raise the level of short-term interest rates at the appropriate time. The model also demonstrates that these tools could be used in different ways to achieve ...
Working Paper
The Fed’s “Ample-Reserves” Approach to Implementing Monetary Policy
We describe the Federal Reserve’s (the Fed’s) approach to implementing monetary policy in an ample-reserves regime. We use a stylized model to explain the factors the Fed considers and the tools it uses to ensure interest rate control when the quantity of reserves is ample. Then, we take a close look at the Fed’s experience operating in this regime in the post-crisis period, both as it has raised and lowered its policy rate. Looking ahead, we highlight some considerations relevant for maintaining a level of reserves consistent with the efficient and effective implementation of ...