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The Impact of Abundant Reserves on Money Markets and Policy Implementation Remarks at SIFMA’s Featured Webinar The Federal Reserve’s Outlook: Markets and Policy Implementation Lorie Logan April 15, 2021 The views presented here are those of the author and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System Figure 1: Assets of the Federal Reserve $ Billion 8,000 Treasuries Agency MBS 7,000 Repurchase Agreements, Swaps, Credit, and Liquidity Facilities* 6,000 Other Assets** 5,000 4,000 3,000 2,000 1,000 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Source: Board of Governors of the Federal Reserve System H.4.1 Statistical Release Note: * includes repurchase agreements, central bank liquidity swaps, primary and secondary credit, Primary Dealer Credit Facility, Money Market Mutual Fund Liquidity Facility, Paycheck Protection Program Liquidity Facility, and net portfolio holdings of the Commercial Paper Funding Facility, Corporate Credit Facilities, Main Street Lending Program, Municipal Liquidity Facility and Term Asset-backed Securities Loan Facility. Note: ** includes agency debt, gold certificates, special drawing rights, coin; foreign currency denominated assets, bank premises, unamortized premiums and discounts on securities held outright, accrued interest, net portfolio holdings of the Maiden Lane LLC, and other accounts receivables. 2 Figure 2: Liabilities of the Federal Reserve $ Billion 8,000 FR Notes (Currency) Reserves 7,000 Treasury General Account (TGA) Overnight Reverse Repuchase Agreements* 6,000 Other Liabilities and Capital 5,000 4,000 3,000 2,000 1,000 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Source: Board of Governors of the Federal Reserve System H.4.1 Statistical Release Note: * includes small volumes of term reverse repurchase agreement exercises in 2015. 3 Figure 3: Reserves as a Share of Total Assets Among Domestic Banks Percent $ Billion 4,500 14 Total Reserves (RHS) 4,000 12 3,500 Reserve Share of Total Assets (LHS) 10 3,000 8 2,500 6 2,000 1,500 4 1,000 2 0 Jan-08 500 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 0 Source: FFIEC 031, Board of Governors of the Federal Reserve System H.4.1 Statistical Release Note: FFIEC 031 data is published on a quarterly basis, whereas the H.4.1 is published on a weekly basis. 4 Figure 4: Reserves Held by Domestic Banks $ Billion U.S. GSIBs Small Domestics 1,600 1,400 Large Domestics Other Depository Institutions 1,200 1,000 800 600 400 200 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Source: Board of Governors of the Federal Reserve System FR 2900 Note: Large Domestics refers to domestically chartered banks with greater than $50 billion in assets. Other Depository Institutions includes credit unions, entities in U.S. territories, and other institutions not reporting assets. 5 Figure 5: Overnight Money Market Rates Percent 0.25 IOER EFFR SOFR 0.20 0.15 0.10 0.05 0.00 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 Source: Federal Reserve Bank of New York, Board of Governors of the Federal Reserve System Note: SOFR was not published on dates with a missing value due to market holidays. 6 Figure 6: OBFR Volumes by Bank Type $ Billion 350 Foreign Banking Organizations Domestic Banks 300 250 200 150 100 50 0 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Source: Federal Reserve Bank of New York Note: The Overnight Bank Funding Rate (OBFR) is a measure of wholesale, unsecured, overnight bank funding costs calculated using federal fund transactions, certain Eurodollar transactions, and certain domestic deposit transactions, all as reported in the FR 2420 Report of Selected Money Market Rates. 7 Figure 7: Year-to-Date Increases in Reserves by Bank Type $ Billion Percent 50 300 Dollar Change (LHS) Percent Change (RHS) 250 45 40 35 200 30 150 25 20 100 15 10 50 5 0 FBOs U.S. GSIBs Other Domestic Banks 0 Source: Board of Governors of the Federal Reserve System FR 2900 Note: Based upon change in reserve levels from January 13, 2021 to April 7, 2021. 8 Figure 8: Government Money Market Fund AUM and Asset Allocation $ Billion 4,000 U.S. Treasuries Repurchase Agreements FRNs Agency Debt 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Jan-16 Source: iMoneyNet Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 9 Figure 9: Government and Prime Money Market Fund AUM $ Billion Count 4,000 600 Government (LHS) 3,500 Prime (LHS) Number of Reporting Funds (RHS) 550 3,000 500 2,500 2,000 450 1,500 400 1,000 350 500 0 2014 2015 2016 2017 2018 2019 2020 300 Source: SEC Division of Investment Management Note: All values correspond to year-end. 10 Figure 10: Money Market Spreads to IOER and Reserves Percent 0.6 0.4 $ Billion Reserves (RHS) EFFR – IOER (LHS) 4,000 09/17/2019 SOFR – IOER: 3.15 SOFR – IOER (LHS) ON RRP – IOER (LHS) 3,500 3,000 0.2 2,500 0.0 2,000 1,500 -0.2 1,000 -0.4 -0.6 Jan-15 500 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 0 Source: Federal Reserve Bank of New York, Board of Governors of the Federal Reserve System H.4.1 Statistical Release Note: SOFR values prior to April 2018 are calculated via indicative data, indicated by the dashed series. 11 Figure 11: Banking System Assets as a Share of GDP Percent 500 Japan Euro area U.K. Canada U.S. 450 400 350 300 250 200 150 100 50 0 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Source: Haver, Bank of Japan, European Central Bank, Bank of England, Bank of Canada, Federal Reserve Note: Data excludes foreign banking organizations in each country. 12 Figure 12: Selected Other Federal Reserve Liabilities $ Billion 600 Other Deposits Foreign Official Deposits FIMA Repo Pool 500 400 300 200 100 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Source: Board of Governors of the Federal Reserve System H.4.1 Statistical Release Note: Other Deposits includes GSE deposits, DFMU deposits, deposits held by international and multilateral organizations, deposits held in joint accounts by depository institutions in connection to their participation in certain private-sector payment arrangements, and certain deposit accounts other than the TGA for services provided by the Reserve Banks as fiscal agents of the United States. 13 Figure 13: First Percentile of Secured Money Market Rates Percent TGCR 1st Percentile – ON RRP 0.4 SOFR 1st Percentile – ON RRP 12/31/2018 SOFR 1st Percentile - ON RRP: 0.45 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Source: Federal Reserve Bank of New York 14 Figure 14: Administered Rate Adjustments Percent 0.25 Spread between Top and Bottom of Target Range ON RRP – Bottom of Target Range IOER – Bottom of Target Range 0.20 0.15 0.10 0.05 0.00 -0.05 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Source: Federal Reserve Bank of New York, Board of Governors of the Federal Reserve System 15