Search Results
Options for reducing the size of the Fed’s balance sheet
Some observers have argued that the Federal Reserve’s balance sheet is too large and complicates the central bank’s operations. We catalog options for reducing the Fed’s major liabilities, which help determine the size of the balance sheet, as well as a framework for assessing the costs and benefits of those options.
Working Paper
Quantifying "Quantitative Tightening" (QT): How Many Rate Hikes Is QT Equivalent To?
How many interest rate hikes is quantitative tightening (QT) equivalent to? In this paper, I examine this question based on the preferred-habitat model in Vayanos and Vila (2021). I define the equivalence between rate hikes and QT such that they both have the same impact on the 10-year yield. Based on the model calibrated to fit the nominal Treasury data between 1999 and 2022, I show that a passive roll-off of $2.2 trillion over three years is equivalent to an increase of 29 basis points in the current federal funds rate at normal times. However, during a crisis period with risk aversion ...
Working Paper
Federal Reserve Balance-Sheet Policy in an Ample Reserves Framework: An Inventory Approach
Implementing monetary policy in an ample reserves regime means choosing a level of reserves that balances the cost of reserves against interest rate volatility. I use techniques from stochastic inventory theory to calibrate the size of the buffer needed to keep reserves above the ample level, and find the buffer size to be modest compared to the level of reserves needed to reach the ample level.
Working Paper
Federal Reserve Balance-Sheet Policy in an Ample Reserves Framework: An Inventory Approach
I apply techniques from stochastic inventory theory to calibrate the optimal balance-sheet buffer needed to implement monetary policy in an ample reserves regime. I quantify the size of the buffer to be about $60 billion. This is small relative to the reserves needed for an ample reserves regime, even though the FOMC appears to act as if the cost of too few reserves is over 20 times as high as the cost of too many.
Speech
Ample liquidity for a safe and efficient banking system
Dallas Fed President Logan delivered these remarks at 'The Evolving Landscape of Bank Funding' conference at the Federal Reserve Bank of Dallas.
Speech
The banking system and the demand for reserves
Dallas Fed President Lorie Logan delivered these remarks at the Eleventh District Banking Conference.
Working Paper
Beyond Reserves: The Federal Reserve's Balance Sheet and the Repo Market
We present a new constraint on the size of the Fed’s balance sheet: repo market capacity. Calibrating a structural model to the recent monetary tightening cycle, we show that repo market capacity—driven by money market fund liquidity supply—is the binding constraint on the Fed’s balance sheet, not bank reserve demand, which was highlighted in the events of September 2019. We also demonstrate a novel complementarity between interest rate and balance sheet policies: higher policy rates expand repo capacity, allowing the central bank to operate with a smaller balance sheet.
Working Paper
International Capital Flows: Private Versus Public Flows in Developing and Developed Countries
Empirically, net capital inflows are pro-cyclical in developed countries and counter-cyclical in developing countries. That said, private inflows are pro-cyclical and public in flows are counter-cyclical in both groups of countries. The dominance of private (public) in flows in developed (developing) countries drives the difference in total net inflows. We rationalize these patterns using a dynamic stochastic two-sector model of a small open economy facing borrowing constraints. Private agents over-borrow because of the pecuniary externality arising from constraints. The government saves ...
Discussion Paper
Reserves and Where to Find Them
Banks use central bank reserves for a multitude of purposes including making payments, managing intraday liquidity outflows, and meeting regulatory and internal liquidity requirements. Data on aggregate reserves for the U.S. banking system are readily accessible, but information on the holdings of individual banks is confidential. This makes it difficult to investigate important questions like: “Which types of banks hold reserves?” “How concentrated are they?” and “Does the distribution change over time or in response to significant events?” In this post, we summarize how ...
Discussion Paper
What If the U.S. Dollar's Global Role Changed?
It isn’t surprising that the dollar is always in the news, given the prominence of the United States in the global economy and how often the dollar is used in transactions around the world (as discussed in a 2010 Current Issues article). But the dollar may not retain this dominance forever. In this post, we consider and catalog the implications for the United States of a potential lessening of the dollar’s primacy in international transactions. The circumstances surrounding such a possibility are important for the effects. As long as U.S. fundamentals remain strong, key consequences could ...