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Discussion Paper
The Role of Central Bank Lending Facilities in Monetary Policy
Lee, Helene; Sarkar, Asani (2017-06-30)
Central bank lending facilities were vital during the financial crisis of 2007-08 when many banks and nonbank financial institutions turned to them to meet funding needs as private funding dried up. Since then, there has been renewed interest in the design of central bank lending facilities in the post-crisis period. In this post, we compare the Federal Reserve?s discount window with the lending facilities at three other major central banks: the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We observe that, relative to the other central banks, the Fed?s ...
Liberty Street Economics , Paper 20170630

Discussion Paper
How the Fed Changes the Size of Its Balance Sheet
Potter, Simon M.; Leonard, Deborah; Martin, Antoine (2017-07-10)
The size of the Federal Reserve’s balance sheet increased greatly between 2009 and 2014 owing to large-scale asset purchases. The balance sheet has stayed at a high level since then through the ongoing reinvestment of principal repayments on securities that the Fed holds. When the Federal Open Market Committee (FOMC) decides to reduce the size of the Fed’s balance sheet, it is expected to do so by gradually reducing the pace of reinvestments, as outlined in the June 2017 addendum to the FOMC’s Policy Normalization Principles and Plans. How do asset purchases increase the size of the ...
Liberty Street Economics , Paper 20170710

Discussion Paper
How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed Securities
Leonard, Deborah; Potter, Simon M.; Martin, Antoine; Rose, Brett (2017-07-11)
In our previous post, we considered balance sheet mechanics related to the Federal Reserve's purchase and redemption of Treasury securities. These mechanics are fairly straightforward and help to illustrate the basic relationships among actors in the financial system. Here, we turn to transactions involving agency mortgage-backed securities (MBS), which are somewhat more complicated. We focus particularly on what happens when households pay down their mortgages, either through regular monthly amortizations or a large payment covering some or all of the outstanding balance, as might occur with ...
Liberty Street Economics , Paper 20170711

Discussion Paper
A Closer Look at the Fed’s Balance Sheet Accounting
Wolgemuth, Jennifer; Martin, Antoine; Leonard, Deborah (2017-08-04)
An earlier post on how the Fed changes the size of its balance sheet prompted several questions from readers about the Federal Reserve?s accounting of asset purchases and the payment of principal by the Treasury on Treasury securities owned by the Fed. In this post, we provide a more detailed explanation of the accounting rules that govern these transactions.
Liberty Street Economics , Paper 20170804

Discussion Paper
Why Pay Interest on Required Reserve Balances?
Martin, Antoine; Wiggins, Heather; Lipscomb, Laura (2017-09-25)
The Federal Reserve has paid interest on reserves held by banks in their Fed accounts since 2008. Why should it do so? Here, we describe some benefits of paying interest on required reserve balances. Since forcing banks to hold unremunerated reserves would be akin to levying a tax on them, paying interest on these balances is a way to eliminate or greatly reduce that tax and its negative effects.
Liberty Street Economics , Paper 20170925

Discussion Paper
Why Pay Interest on Excess Reserve Balances?
Wiggins, Heather; Lipscomb, Laura; Martin, Antoine (2017-09-27)
In a previous post, we described some reasons why it is beneficial to pay interest on required reserve balances. Here we turn to arguments in favor of paying interest on excess reserve balances. Former Federal Reserve Chairman Ben Bernanke and former Vice Chairman Donald Kohn recently discussed many potential benefits of paying interest on excess reserve balances and some common misunderstandings, including that paying interest on reserves restricts bank lending and provides a subsidy to banks. In this post, we focus primarily on benefits related to the efficiency of the payment system and ...
Liberty Street Economics , Paper 20170927

Discussion Paper
U.S. Monetary Policy as a Changing Driver of Global Liquidity
Schiaffi, Stefano; Avdjiev, Stefan; Gambacorta, Leonardo; Goldberg, Linda S. (2017-10-11)
International capital flows channel large volumes of funds across borders to both public and private sector borrowers. As they are critically important for economic growth and financial stability, understanding their main drivers is crucial for both policymakers and researchers. In this post, we explore the evolving impact of changes in U.S. monetary policy on global liquidity.
Liberty Street Economics , Paper 20171011

Discussion Paper
Fiscal Implications of the Federal Reserve’s Balance Sheet Normalization
Del Negro, Marco; Rosa, Carlo; Malin, Benjamin A.; Grasing, Jamie; Cavallo, Michele; Frame, W. Scott (2018-01-09)
In the wake of the global financial crisis, the Federal Reserve dramatically increased the size of its balance sheet?from about $900 billion at the end of 2007 to about $4.5 trillion today. At its September 2017 meeting, the Federal Open Market Committee (FOMC) announced that?effective October 2017?it would initiate the balance sheet normalization program described in the June 2017 addendum to the FOMC?s Policy Normalization Principles and Plans.
Liberty Street Economics , Paper 20180109

Discussion Paper
How Do the Fed's MBS Purchases Affect Credit Allocation?
Martin, Antoine; Schulhofer-Wohl, Sam (2018-08-06)
It is sometimes said that the Federal Reserve should not engage in “credit allocation.” But what does credit allocation actually mean? And how do current Fed policies affect the allocation of credit? In this post, we describe two separate ideas often associated with credit allocation. The first idea is that the Fed should not take credit risk, which taxpayers would ultimately have to bear. The second idea is that the Fed’s actions should not influence the flow of credit to particular sectors. We consider whether the Fed’s holdings of agency mortgage-backed securities (MBS) could ...
Liberty Street Economics , Paper 20180806

Discussion Paper
How Do the Fed's MBS Holdings Affect the Economy?
Martin, Antoine; Schulhofer-Wohl, Sam (2018-08-08)
In our previous post, we discussed the meaning of the term “credit allocation” and how it relates to the Federal Reserve’s holdings of agency mortgage-backed securities (MBS). We concluded that the Fed’s MBS holdings do not pose significant credit risk but that the Fed does influence the relative market price of credit when it purchases agency MBS, and this indirectly influences decisions by investors. Today, we take the next step and discuss how the Fed’s MBS purchases affect the U.S. economy and, in particular, how the effect of MBS purchases can differ from the effect of ...
Liberty Street Economics , Paper 20180808

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