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Observations on Implementing Monetary Policy in an Ample-Reserves Regime Remarks before the Money Marketeers of New York University New York City Lorie K. Logan April 17, 2019 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: Stylized Monetary Policy Implementation Frameworks Pre-Crisis Framework Ample-Reserves Regime Framework Interest Rate Marginal Lending Rate (primary credit rate) Interest Rate Marginal Lending Rate (primary credit rate) Target Rate IOER ON RRP 0 Supply of Reserves Reserve Balances 0 Reserve Balances 2 Figure 2: Select Overnight Money Market Rates Percent 2.75 2.50 Target Range Secured Overnight Financing Rate (SOFR) Interest on Excess Reserves (IOER) Effective Fed Funds Rate (EFFR) Implementation Of Money Market Reform 1st IOER Technical Adjustment 2nd IOER Technical Adjustment 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Note: Data excludes day before quarter-ends, quarter-ends, day after quarter-ends, and month-ends. Source: Federal Reserve Bank of New York, Federal Reserve Board of Governors Aug-18 Dec-18 Apr-19 3 Figure 3: Assets and Liabilities of the Federal Reserve Assets of the Federal Reserve $ Billions 5,000 Treasuries Agency MBS Other Assets Agency Debt Liabilities of the Federal Reserve $ Billions 5,000 4,500 4,500 4,000 4,000 3,500 3,500 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 2007 2009 2011 2013 2015 2017 2019 0 2007 Federal Reserve Notes TGA and SFA Reserves 2009 2011 2013 RRPs and TDF Other Liab. and Capital 2015 2017 2019 Note: TGA is Treasury General Account, SFA is Supplementary Financing Account, RRPs are Reverse Repo Agreements, TDF is Term Deposit Facility, Federal Reserve Notes are currency in circulation. Source: Board of Governors of the Federal Reserve System H.4.1 Statistical Release 4 Figure 4: Drivers of Banks’ Lowest Comfortable Level of Reserves (LCLoR) Percent of Respondents who Responded Important or Very Important Domestic Foreign 1) Meeting routine intraday payment flows 57% 65% 2) Meeting potential deposit outflows 73% 35% 3) Satisfying internal liquidity stress metrics 63% 75% 4) Satisfying the bank's reserve requirements 50% 43% 5) Seeking to earn IOER rate 10% 24% 6) Managing liquidity portfolio 30% 48% Note: The exact question respondents were asked was “Please rate the importance to your bank of the following considerations in determining the amount you indicated in question 1 on a scale of 1 (not important), 2 (somewhat important), 3 (important), or 4 (very important), or, if the factor is not applicable to your bank (for example, your bank is not subject to the regulatory requirement or does not engage in the described activity), please select ‘N/A.’” Factors included: a) Meeting routine intraday payment flows, b) Meeting potential deposit outflows, c) Satisfying internal liquidity stress metrics, d) Satisfying the bank’s reserve requirements, e) Seeking to earn the IOER rate instead of the return on other high-quality liquid assets, f) Managing liquidity portfolio based on monetization assumptions for high-quality liquid assets. Source: September 2018 Senior Financial Officer Survey (SFOS) 5 Figure 5: Lowest Comfortable Level of Reserves (LCLoR) By Bank Type Average Reserve Balances in August 2018 Reported LCLoR Extrapolated Demand for Reserves $ Billions 900 800 700 600 500 400 300 200 100 0 Domestic Foreign Rest of the Banking System Note: Extrapolated demand for reserves for the rest of the banking system based on various estimation methodologies that use the 2018 Senior Financial Officer Survey responses suggest total demand is between $822 billion and $896 billion. See: “Estimating System Demand for Reserve Balances Using the 2018 Senior Financial Officer Survey”, FEDS Notes published on April 9, 2019 Source: Federal Reserve Bank of New York; September 2018 Senior Financial Officer Survey (SFOS); Staff Calculations 6 Figure 6: Overnight Bank Funding Markets Trading Volumes at Rates Relative to IOER Thousands $ Billions 160 > IOER+2 IOER IOER-3 IOER+2 IOER-1 < IOER-3 IOER+1 IOER-2 Median volume 140 120 100 80 60 40 20 0 Jan-19 Feb-19 Mar-19 Note: Overnight bank funding markets include the federal funds and Eurodollar markets. Source: FR 2420 Report of Selected Money Market Rates Apr-19 7 Figure 7: Daily Changes in Reserve Balances versus Daily Changes in EFFR – IOER Spread 2018 2019 Daily Changes in EFFR-IOER Spread (BPS) 2 1 0 -1 -2 -100 -80 -60 -40 -20 0 20 40 60 80 100 Daily Changes in Reserve Balances ($ Billions) Note: Excludes first and last business day of the month. Reserves exclude GSE balances. Source: Federal Reserve Bank of New York, Board of Governors of the Federal Reserve System H.4.1 Statistical Release 8 Figure 8: Weekly Changes in Reserves versus Weekly Changes in Treasury General Account 2018 2019 120 Weekly Changes in TGA ($ Billions) 80 40 0 -40 -80 -120 -120 -80 -40 0 40 80 120 Weekly Changes in Reserves ($ Billions) Note: Data shows changes in Wednesday to Wednesday levels. Source: Board of Governors of the Federal Reserve System H.4.1 Statistical Release 9 Figure 9: Variability of Non-Reserve Liabilities and Capital, Distribution of Changes in Weekly Levels $ Billions Interquartile Range Median 400 300 200 100 0 -100 -200 -300 -400 -500 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Note: Box plots indicate median, interquartile range, with maximum and minimum observations as whiskers. Data shows the distribution of changes from Wednesday to Wednesday for all non-reserve liabilities (currency, Treasury accounts, foreign repo pool, other deposits, overnight and term reverse repos conducted with private counterparties, and term deposits held by depository institutions). Source: Board of Governors of the Federal Reserve System H.4.1 Statistical Release 10