Search Results
Report
Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve Demand Curve
What level of central bank reserves satiates banks’ demand for liquidity? We estimate the slope of the reserve demand curve in the U.S. over 2010–2024 using a time-varying instrumental-variable approach at the daily frequency. When reserves exceed 12-13 percent of banks’ assets, demand for reserves is satiated and reserves are abundant; below this threshold, the curve’s slope becomes increasingly negative as reserves decline from ample to scarce. We also find that reserve demand has shifted over time, both vertically and horizontally, and identify important drivers of vertical shifts. ...
Journal Article
Monetary Policy Implementation with Ample Reserves
The Federal Reserve currently implements its interest rate policy under a framework known as the floor system. In order for the floor system to operate smoothly, there must be sufficient liquidity in the federal funds market. The ongoing goal of quantitative tightening (QT) is to reach the minimal level of market liquidity required to implement monetary policy efficiently and effectively, also known as an ample reserves regime. We briefly discuss changes in the monetary policy framework from the previous corridor system to today’s floor system as well as the circumstances that brought them ...
Report
Evaluating the quality of fed funds lending estimates produced from Fedwire payments data
A number of empirical analyses of interbank lending rely on indirect inferences from individual interbank transactions extracted from payments data using algorithms. In this paper, we conduct an evaluation to assess the ability of identifying overnight U.S. fed funds activity from Fedwire payments data. We find evidence that the estimates extracted from the data are statistically significantly correlated with banks' fed funds borrowing as reported on the FRY-9C. We find similar associations for fed funds lending, although the correlations are lower. To be conservative, we believe that the ...
Working Paper
A Tale of Demand and Supply for Central Bank Reserves
In an ample-reserves framework, administered rates anchor money markets but suppress information from unsecured interbank trading. We recover that information by isolating the small interbank segment of the federal funds market. Using high-frequency bank-level data, we employ deposit shocks as an instrument for bank borrowing demand. Our analysis reveals that non-bank lenders, such as Federal Home Loan Banks, supply funds elastically, whereas bank lenders exhibit price inelasticity, which intensifies as their reserve balances decline, particularly for bankers’ banks. This interbank segment ...
Report
Monetary Policy Implementation with an Ample Supply of Reserves
We offer a parsimonious model of the reserve demand to study the trade-offs associated with various monetary policy implementation frameworks. Our model considers a reserve demand function that encompasses banks' preferences for reserves in the post 2007-2009 financial crisis world and incorporates shocks to the demand for and the supply of reserves. We find that the best policy implementation outcomes are realized when reserves are somewhere in between scarce and abundant. This outcome is consistent with the Federal Open Market Committee's 2019 announcement to implement monetary policy in a ...
Working Paper
Excess Reserves and Monetary Policy Implementation
In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. We provide a parsimonious model that captures the key features of the current federal funds market along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. We use this model to analyze ...
Working Paper
Monetary policy implementation with an ample supply of reserves
Methods of monetary policy implementation continue to change. The level of reserve supply—scarce, abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007-2009 financial crisis. We find that the optimal level of reserve supply ...
Report
The Market Events of Mid-September 2019
This paper studies the mid-September 2019 stress in U.S. money markets: On September 16 and 17, unsecured and secured funding rates spiked up and, on September 17, the effective federal funds rate broke the ceiling of the Federal Open Market Committee (FOMC) target range. We highlight two factors that may have contributed to these events. First, reserves may have become scarce for at least some depository institutions, in the sense that these institutions’ reserve holdings may have been close to, or lower than, their desired level. Moreover, frictions in the interbank market may have ...
Working Paper
Monetary Policy Implementation with an Ample Supply of Reserves
Methods of monetary policy implementation continue to change. The level of reserve supply—scarce, abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007–09 financial crisis. We find that the optimal level of reserve supply ...
Speech
Balance Sheet Normalization: Monitoring Reserve Conditions and Understanding Repo Market Pressures
Remarks at 2024 U.S. Treasury Market Conference, Federal Reserve Bank of New York, New York City.