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Discussion Paper
Did the Fed’s Term Auction Facility Work?
Sarkar, Asani; McAndrews, James J.; Wang, Zhenyu (2011-10-11)
The Federal Reserve introduced the Term Auction Facility (TAF) in December 2007 to provide term loans to banks during the recent financial crisis. In this post, we report on the effectiveness of the TAF during the early stages of the crisis. We find that the TAF was associated with a decrease in the “liquidity premium,” one component of a bank’s borrowing cost. In other words, the TAF worked as intended.
Liberty Street Economics , Paper 20111011

Discussion Paper
Crisis Chronicles: Railway Mania, the Hungry Forties, and the Commercial Crisis of 1847
Narron, James; Morgan, Donald P. (2015-06-05)
Money was plentiful in the United Kingdom in 1842, and with low yields on government bonds and railway shares paying handsome dividends, the desire to speculate spread?as one observer put it, ?the contagion passed to all, and from the clerk to the capitalist the fever reigned uncontrollable and uncontrolled? (Francis?s History of the Bank of England). And so began railway mania. Just as that bubble began to burst, a massive harvest failure in England and Ireland led to surging food imports, which drained gold reserves from the Bank of England. Constrained by the Bank Charter Act, the Bank ...
Liberty Street Economics , Paper 20150605

Discussion Paper
The Final Crisis Chronicle: The Panic of 1907 and the Birth of the Fed
Narron, James; Morgan, Donald P. (2016-11-18)
The panic of 1907 was among the most severe we?ve covered in our series and also the most transformative, as it led to the creation of the Federal Reserve System. Also known as the ?Knickerbocker Crisis,? the panic of 1907 shares features with the 2007-08 crisis, including ?shadow banks? in the form high-flying, less-regulated trusts operating beyond the safety net of the time, and a pivotal ?Lehman moment? when Knickerbocker Trust, the second-largest trust in the country, was allowed to fail after J.P. Morgan refused to save it.
Liberty Street Economics , Paper 20161118

Report
Federal Reserve tools for managing rates and reserves
Martin, Antoine; Skeie, David R.; McAndrews, James J.; Palida, Ali (2013-09-01)
The Federal Reserve announced in January 2019 that it would maintain an ample supply of reserves amid its balance sheet reduction. We model the impact of reserves on banks? liquidity and balance sheet costs. In competitive general equilibrium, the optimal supply of reserves equates bank deposit rates to the interest rate paid on excess reserves (IOER), consistent with ample reserves. Raising the Fed?s overnight reverse repo rate up to IOER would increase liquidity, expediently reduce the overabundance of reserves, and stabilize the volatility of overnight market rates. Empirical analysis ...
Staff Reports , Paper 642

Report
Direct purchases of U.S. Treasury securities by Federal Reserve banks
Garbade, Kenneth D. (2014-08-01)
Until 1935, Federal Reserve Banks from time to time purchased short-term securities directly from the United States Treasury to facilitate Treasury cash management operations. The authority to undertake such purchases provided a robust safety net that ensured Treasury could meet its obligations even in the event of an unforeseen depletion of its cash balances. Congress prohibited direct purchases in 1935, but subsequently provided a limited wartime exemption in 1942. The exemption was renewed from time to time following the conclusion of the war but ultimately was allowed to expire in 1981. ...
Staff Reports , Paper 684

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
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

Discussion Paper
The COVID-19 Pandemic and the Fed’s Response
Sarkar, Asani; Fleming, Michael J.; Van Tassel, Peter (2020-04-15)
The Federal Reserve has taken unprecedented actions to mitigate the effects of the COVID-19 pandemic on U.S. households and businesses. These measures include cutting the Fed’s policy rate to the zero lower bound, purchasing Treasury and mortgage-backed securities (MBS) to promote market functioning, and establishing several liquidity and credit facilities. In this post, we briefly review the developments motivating these actions, summarize what the Fed has done and why, and compare the Fed’s response with its response to the 2007-09 financial crisis.
Liberty Street Economics , Paper 20200415

Discussion Paper
The Primary Dealer Credit Facility
McLaughlin, Susan; Martin, Antoine (2020-05-19)
On March 17, 2020, the Federal Reserve announced that it would re-establish the Primary Dealer Credit Facility (PDCF) to allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households. The PDCF started offering overnight and term funding with maturities of up to ninety days on March 20. It will be in place for at least six months and may be extended as conditions warrant. In this post, we provide an overview of the PDCF and its usage to date.
Liberty Street Economics , Paper 20200519

Discussion Paper
Treasury Market Liquidity and the Federal Reserve during the COVID-19 Pandemic
Fleming, Michael J. (2020-05-29)
Many of the actions taken by the Federal Reserve during the COVID-19 pandemic are intended to address a deterioration of market functioning. The Federal Open Market Committee (FOMC) announced purchases of Treasury securities and agency mortgage-backed securities (MBS), in particular, “to support the smooth functioning of markets” in those securities. Last month, we showed in this post how one metric of functioning for the Treasury market, market illiquidity, jumped to unusually high levels in March amid massive uncertainty about the economic effects of the pandemic. In this post, we ...
Liberty Street Economics , Paper 20200529a

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