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Discussion Paper
Who’s Lending in the Federal Funds Market?
The fed funds market is important to the framework and implementation of U.S. monetary policy. The Federal Open Market Committee sets a target level or range for the fed funds rate and directs the Trading Desk of the New York Fed to create ?conditions in reserve markets? that will encourage fed funds to trade at the target level. In this post, we use various publicly available data sources to estimate the size and composition of fed funds lending activity. We find that the fed funds market has shrunk considerably since the financial crisis and that lending activity is now dominated by one ...
Discussion Paper
The New Overnight Bank Funding Rate
The Federal Reserve Bank of New York will begin publishing the overnight bank funding rate (OBFR) sometime in the first few months of 2016. The OBFR will be a broad measure of U.S. dollar funding costs for U.S.-based banks as it will be calculated using both fed funds and Eurodollar transactions, as reported in a new data collection?the FR 2420 Report of Selected Money Market Rates. In a recent post, ?The Eurodollar Market in the United States,? we described the Eurodollar activity of U.S.-based banks and compared recent fed funds and Eurodollar rates. Here, we look at the historical ...
Working Paper
Interest on Reserves and Arbitrage in Post-Crisis Money Markets
Currently, Eurodollars and fed funds markets combined trade about $220 billion in funds daily, the vast majority of which with overnight tenor. In this paper, we document several features of these wholesale unsecured dollar funding markets. Using daily confidential data on wholesale unsecured borrowing and reserve balances, we show that foreign banks, which make up most of the trading volumes in these markets, keep around 99% of each additional Eurodollar and 80% of each fed fund borrowed as reserve balances. With these risk-free trades, banks earn the spread between interest on reserves and ...
Working Paper
Demand Segmentation in the Federal Funds Market
This paper outlines a model of demand segmentation in the federal funds market with two types of borrowers - the "interest on reserves (IOR) arbitrage'' type and the "regulatory'' type - which have different reservation prices and cannot always be separated. When fed funds trade above IOR, the "regulatory" type is revealed and consequently pays an interest rate closer to its real reservation price, pushing the fed funds rate further up. When fed funds trade below IOR, a decrease in the fed funds rate encourages entry in the market for IOR arbitrage purposes thus counteracting the downward ...
Journal Article
Inflation Expectations Limit the Power of Negative Interest Rates
Both the federal funds rate and longer-run yields have dropped to near zero, renewing discussion of negative interest rate policy. Although negative rates would allow for additional cuts in the United States, negative policy rates in line with what other countries have implemented would not be able to achieve the nominal rate reduction of previous easing cycles. Moreover, inflation expectations remained flat or fell after negative rates were introduced in most countries, limiting the expansionary power of these additional rate cuts.
Discussion Paper
The Federal Reserve’s Two Key Rates: Similar but Not the Same?
Since the global financial crisis, the Federal Reserve has relied on two main rates to implement monetary policy—the rate paid on reserve balances (IORB rate) and the rate offered at the overnight reverse repo facility (ON RRP rate). In this post, we explore how these tools steer the federal funds rate within the Federal Reserve’s target range and how effective they have been at supporting rate control.