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Author:McGowan, John 

Discussion Paper
How the Fed Smoothed Quarter-End Volatility in the Fed Funds Market
The federal funds market is an important source of short-term funding for U.S. banks. In this market, banks borrow reserves on an unsecured basis from other banks and from government-sponsored enterprises, typically overnight. Before the financial crisis, the Federal Reserve implemented monetary policy by targeting the overnight fed funds rate and then adjusting the supply of bank reserves every day to keep the rate close to the target. Before the crisis, reserves were generally in scarce supply, which periodically caused temporary spikes in the fed funds rate during times of high demand, typically at the end of each quarter. In this post, we show that the Fed actively responded to quarter-end volatility by injecting reserves into the banking system around these dates.
AUTHORS: Alex Entz; McGowan, John; Sarkar, Asani
DATE: 2016-03-28

Report
The pre-crisis monetary policy implementation framework
This article describes the Federal Reserve?s monetary policy operating framework prior to the expansion of the Fed?s balance sheet during the financial crisis. To implement the Fed?s mandate of promoting price stability consistent with full employment, the Federal Open Market Committee (FOMC) sets a target for the overnight rate in the federal funds market, where banks trade reserve balances. In the pre-crisis framework, aggregate reserves were scarce such that relatively small changes in the level of reserves would affect rates in the fed funds market. The New York Fed?s open market trading desk (?the Desk?) forecasted demand for and supply of reserves on a daily basis, and then conducted repo operations with primary dealers to supply enough reserves to maintain the equilibrium rate close to its target. The Desk was successful in achieving this objective; the fed funds rate generally remained close to its target, and any deviations were quickly corrected. However, the pre-crisis operating procedures deployed were more complex and opaque than alternative operating frameworks, required substantial intraday overdrafts from the Fed to meet banks? short-term payment needs, and had to be abandoned once the Fed?s balance sheet expanded in response to the financial crisis. Since the crisis, the Desk has successfully controlled the policy rate using a new framework, suggesting that effective monetary control may be achieved through a different framework.
AUTHORS: Kroeger, Alexander; McGowan, John; Sarkar, Asani
DATE: 2017-03-01

Journal Article
The pre-crisis monetary policy implementation framework
This article describes the Federal Reserve?s (?the Fed?s?) operating framework for monetary policy prior to the expansion of the Fed?s balance sheet during the financial crisis. To implement the Fed?s mandate of promoting price stability consistent with full employment, the Federal Open Market Committee (FOMC) sets a target for the overnight rate in the federal funds market, where banks trade reserve balances. In the pre-crisis framework, aggregate reserves were scarce, so relatively small changes in the level of reserves would affect rates in the fed funds market. The Federal Reserve Bank of New York?s Open Market Trading Desk (?the Desk?) forecasted the demand for and supply of reserves on a daily basis, and then conducted repo operations with primary dealers with the objective of supplying enough reserves to maintain the equilibrium rate close to its target. The Desk was successful in achieving this objective, since the fed funds rate generally did remain close to its target, and any deviations were quickly corrected. However, the pre-crisis operating procedures deployed by the Desk were more complex and opaque than alternative operating frameworks, required substantial intraday overdrafts from the Fed to meet banks? short-term payment needs, and had to be abandoned once the Fed?s balance sheet expanded in response to the financial crisis. Since the crisis, the Desk has successfully controlled the policy rate using a new framework, suggesting that effective monetary control may be achieved through different frameworks.
AUTHORS: Sarkar, Asani; McGowan, John; Kroeger, Alexander
DATE: 2018

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