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Working Paper
What does financial volatility tell us about macroeconomic fluctuations?
This paper provides an extensive analysis of the predictive ability of financial volatility measures for economic activity. We construct monthly measures of stock and bond market volatility from daily returns and model volatility as composed of a long-run component that is common across all series, and a set of idiosyncratic short-run components. Based on powerful in-sample predictive ability tests, we find that the stock volatility measures and the common factor significantly improve short-term forecasts of conventional financial indicators. A real-time out of sample assessment yields a ...
Discussion Paper
An Analysis of the Interest Rate Risk of the Federal Reserve’s Balance Sheet, Part 2: Projections under Alternative Interest Rate Paths
As discussed in the first note of this two-note series, net income of the Federal Reserve (Fed) and its remittances to the U.S. Treasury along with the unrealized gain or loss position of the System Open Market Account (SOMA) portfolio are affected by fluctuations in interest rates. The need for the Fed to increase the policy rate expeditiously to address the inflationary pressures is projected to result in the Fed's net income turning negative temporarily.
Discussion Paper
An Analysis of the Interest Rate Risk of the Federal Reserve’s Balance Sheet, Part 1: Background and Historical Perspective
As part of its implementation of monetary policy, the Federal Reserve (Fed) holds Treasury securities and agency mortgage-backed securities (MBS) in the System Open Market Account (SOMA). The market value of these securities and the Fed's income fluctuate with changes in interest rates. As such, the ongoing increases in policy rates to address inflationary pressures are expected to put downward pressure on the Fed's net income.
Working Paper
The Fed’s “Ample-Reserves” Approach to Implementing Monetary Policy
We describe the Federal Reserve’s (the Fed’s) approach to implementing monetary policy in an ample-reserves regime. We use a stylized model to explain the factors the Fed considers and the tools it uses to ensure interest rate control when the quantity of reserves is ample. Then, we take a close look at the Fed’s experience operating in this regime in the post-crisis period, both as it has raised and lowered its policy rate. Looking ahead, we highlight some considerations relevant for maintaining a level of reserves consistent with the efficient and effective implementation of ...
Discussion Paper
Overnight Reverse Repurchase (ON RRP) Operations and Uncertainty in the Repo Market
In this note, we analyze the effects of the ON RRP operations on daily repo rate uncertainty--based on revisions to the repo rate forecast--and intraday repo rate volatility.
Discussion Paper
Dynamics of Overnight Money Markets: What Has Changed at the Zero Lower Bound?
In this note we provide a comparative analysis of overnight money market dynamics before the crisis and after the target federal funds rate (FFR) has been lowered to the zero lower bound (ZLB).
Discussion Paper
What Happened in Money Markets in September 2019?
In mid-September 2019, overnight money market rates spiked and exhibited significant volatility, amid a large drop in reserves due to the corporate tax date and increases in net Treasury issuance.
Working Paper
Effects of Changing Monetary and Regulatory Policy on Overnight Money Markets
Money markets have been operating under a new monetary policy implementation framework since the Federal Reserve started paying interest on bank reserves in late 2008. The regulatory environment has also evolved substantially over this period. We develop and test hypotheses regarding the effects of changes in the monetary and regulatory policy on dynamics of key overnight funding markets. We find that the federal funds rate continued to provide an anchor, albeit weaker, for unsecured funding rates amid substantial decline in activity and changing composition of trades, while its transmission ...
Discussion Paper
Implementing Monetary Policy in an "Ample-Reserves" Regime: Maintaining an Ample Quantity of Reserves (Note 2 of 3)
In this second note, we describe some important influences on the supply of and demand for reserves and how the Fed will need to account for these influences in maintaining an ample quantity of reserves over the long run. These considerations are most relevant in normal times, not in periods in which there are severe strains in financial markets or weakness in economic activity that necessitate aggressive policy actions by the Fed that substantially increase reserves.
Discussion Paper
Implementing Monetary Policy in an "Ample-Reserves" Regime: The Basics (Note 1 of 3)
The FOMC has stated that it intends to continue implementing monetary policy in a regime with an ample supply of reserves. This Note, the first in a three-part series, provides an introductory discussion of what it means to implement policy in such a regime and how the Fed ensures interest rate control in an environment with an ample supply of reserves in the banking system.