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Discussion Paper
How the Fed Changes the Size of Its Balance Sheet
Leonard, Deborah; Martin, Antoine; Potter, Simon M. (2017-07-10)
The size of the Federal Reserve’s balance sheet increased greatly between 2009 and 2014 owing to large-scale asset purchases. The balance sheet has stayed at a high level since then through the ongoing reinvestment of principal repayments on securities that the Fed holds. When the Federal Open Market Committee (FOMC) decides to reduce the size of the Fed’s balance sheet, it is expected to do so by gradually reducing the pace of reinvestments, as outlined in the June 2017 addendum to the FOMC’s Policy Normalization Principles and Plans. How do asset purchases increase the size of the ...
Liberty Street Economics , Paper 20170710

Discussion Paper
Why Are Interest Rates So Low?
Cocci, Matthew; Shahanaghi, Sara; Giannoni, Marc; Del Negro, Marco; Smith, Micah (2015-05-20)
In a recent series of blog posts, the former Chairman of the Federal Reserve System, Ben Bernanke, has asked the question: 'Why are interest rates so low?' (See part 1, part 2, and part 3.) He refers, of course, to the fact that the U.S. government is able to borrow at an annualized rate of around 2 percent for ten years, or around 3 percent for thirty years. If you expect that inflation is going to be on average 2 percent over the next ten or thirty years, this implies that the U.S. government can borrow at real rates of interest between 0 and 1 percent at the ten- and thirty-year ...
Liberty Street Economics , Paper 20150520

Discussion Paper
The Fed’s Balance Sheet Runoff: The Role of Levered NBFIs and Households
Cipriani, Marco; Clouse, James A.; Logan, Lorie; Martin, Antoine; Riordan, Will (2022-04-12)
In a Liberty Street Economics post that appeared yesterday, we described the mechanics of the Federal Reserve’s balance sheet “runoff” when newly issued Treasury securities are purchased by banks and money market funds (MMFs). The same mechanics would largely hold true when mortgage-backed securities (MBS) are purchased by banks. In this post, we show what happens when newly issued Treasury securities are purchased by levered nonbank financial institutions (NBFIs)—such as hedge funds or nonbank dealers—and by households.
Liberty Street Economics , Paper 20220412

Report
Coarse Pricing Policies
Stevens, Luminita (2015-11-23)
The puzzling behavior of inflation in the Great Recession and its aftermath has increased the need to better understand the constraints that firms face when setting prices. Using new data and theory, I demonstrate that each firm's choice of how much information to acquire to set prices determines aggregate price dynamics through the patterns of pricing at the micro level, and through the large heterogeneity in pricing policies across firms. Viewed through this lens, the behavior of prices in recent years becomes less puzzling, as firms endogenously adjust their information acquisition ...
Staff Report , Paper 520

Discussion Paper
The Post-Pandemic r*
Baker, Katie; Casey, Logan; Del Negro, Marco; Gleich, Aidan; Nallamotu, Ramya (2023-08-09)
The debate about the natural rate of interest, or r*, sometimes overlooks the point that there is an entire term structure of r* measures, with short-run estimates capturing current economic conditions and long-run estimates capturing more secular factors. The whole term structure of r* matters for policy: shorter run measures are relevant for gauging how restrictive or expansionary current policy is, while longer run measures are relevant when assessing terminal rates. This two-post series covers the evolution of both in the aftermath of the pandemic, with today’s post focusing especially ...
Liberty Street Economics , Paper 20230809

Working Paper
Even Keel and the Great Inflation
Mukherjee, Sanchita; Humpage, Owen F.; Consolvo, Victoria (2020-10-23)
During the early part of the Great Inflation (1965-1975), the Federal Reserve undertook even-keel operations to assist the US Treasury’s coupon security sales. Accordingly, the central bank delayed any tightening of monetary policy and permanently injected reserves into the banking system. Using real-time Taylor-type and McCallum-like reaction functions, we show that the Fed routinely undertook these operations only when it was otherwise tightening monetary policy. Using a quantity-equation framework, we show that the Federal Reserve’s even-keel actions added approximately one percentage ...
Working Papers , Paper 20-33

Discussion Paper
The New Overnight Bank Funding Rate
Cipriani, Marco; Spiegel, Adam; Kessler, Matthew; Gouny, Julia (2015-11-09)
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 ...
Liberty Street Economics , Paper 20151109

Working Paper
Macroeconomic Dynamics Near the ZLB : A Tale of Two Countries
Schorfheide, Frank; Cuba-Borda, Pablo A.; Aruoba, S. Boragan (2016-05)
We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium a sunspot shock can move the economy from a regime in which inflation is close to the central bank's target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A nonlinear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s ...
International Finance Discussion Papers , Paper 1163

Working Paper
Forward Guidance: Communication, Commitment, or Both?
Bassetto, Marco (2019-07-25)
A policy of forward guidance has been suggested either as a form of commitment ("Odyssean") or as a way of conveying information to the public ("Delphic"). I analyze the strategic interaction between households and the central bank as a game in which the central bank can send messages to the public independently of its actions. In the absence of private information, the set of equilibrium payoffs is independent of the announcements of the central bank: forward guidance as a pure commitment mechanism is a redundant policy instrument. When private information is present, central bank ...
Working Paper Series , Paper WP-2019-5

Discussion Paper
Who’s Borrowing and Lending in the Fed Funds Market Today?
Afonso, Gara; Cisternas, Gonzalo; Gowen, Brian; Miu, Jason; Younger, Josh (2023-10-10)
The Federal Open Market Committee (FOMC) communicates the stance of monetary policy through a target range for the federal funds rate, which is the rate set in the market for uncollateralized short-term lending and borrowing of central bank reserves in the U.S. Since the global financial crisis, the market for federal funds has changed markedly. In this post, we take a closer look at who is currently trading in the federal funds market, as well as the reasons for their participation.
Liberty Street Economics , Paper 20231010

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