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Operational Perspectives on Monetary Policy Implementation: Panel Remarks on “The Future of the Central Bank Balance Sheet” Lorie K. Logan Deputy Manager, System Open Market Account Senior Vice President, Markets Group Currencies, Capital, and Central Bank Balance Sheets: A Policy Conference Hoover Institution, Stanford University May 4, 2018 Figure 1: Historical and Projected SOMA Domestic Securities Holdings USD, billions Smaller liabilities scenario Median liabilities scenario Larger liabilities scenario Historical holdings 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Source: Federal Reserve Bank of New York staff projections (Report on Open Market Operations during 2017). Note: Figures are as of year-end. Figures for 2018 onwards (dashed lines) are projected holdings and are rounded. Scenarios are based on the 25th, 50th, and 75th percentile responses to a question about expectations for the size and composition of the Federal Reserve’s balance sheet, on average in 2025, conditional on not moving to the zero lower bound, in the Federal Reserve Bank of New York’s December 2017 Survey of Primary Dealers and Survey of Market Participants. Figure 2: Federal Reserve Liabilities and Capital Billions of U.S. Dollars Pre-Crisis Average (H1 2007*) Current Level (4/25/18) 16 Expected Average Value in 2025** Smaller Liabilities Scenario Median Scenario Larger Liabilities Scenario 2,011 412 600 750 772 1,596 1,900 2,200 2,400 Treasury General Account 6 403 200 300 365 Other deposits 0 80 50 75 100 Reverse repos (foreign official accounts) 34 235 120 200 250 Reverse repos (private counterparties) n/a 4 58 100 150 All other liabilities and capital 40 45 50 50 57 Total 869 4,373 2,790 3,525 4,072 Reserve balances Non-reserve liabilities: Federal Reserve notes Sources: Federal Reserve Board; Federal Reserve Bank of New York. * Average of Wednesday levels. ** Expected average values in 2025 are based on the 25th, 50th, and 75th percentile responses to a question about expectations for the size and composition of the Federal Reserve’s balance sheet, conditional on not moving to the zero lower bound, in the Federal Reserve Bank of New York’s December 2017 Survey of Primary Dealers and Survey of Market Participants. Figure 3: Stylized Monetary Policy Implementation Frameworks Interest rate Scarce Reserves (corridor) Abundant Reserves (floor) Marginal lending rate (primary credit rate) Demand for reserves Marginal deposit rate (IOER rate) ON RRP rate 0 Required Reserves Reserve balances Figure 4: Intraday and Interday Volatility in Fed Funds Rates during the Crisis Daily Overnight Federal Funds Trading Range Percent 10 Federal funds trading range Federal funds target rate Primary credit facility rate (15%) Daily Effective Fed Funds Rate Less Target Rate Basis points 100 (11%) 9 8 50 7 6 0 5 4 -50 3 2 -100 1 0 -150 Source: Federal Reserve Bank of New York. Note: Time series end on December 15, 2008, when the FOMC introduced a target range for the federal funds rate. Figure 5: Variability of Non-Reserve Liabilities and Capital USD, billions 200 Distributions of Changes in Weekly Averages of Non-Reserve Liabilities and Capital* 150 100 50 0 -50 -100 -150 Sources: Federal Reserve Board; Federal Reserve Bank of New York staff calculations. * Boxes indicate interquartile ranges, and whiskers indicate minimum and maximum outcomes. Data show the distribution of changes in weekly averages of daily figures for liabilities outside the direct control of the Fed (currency, Treasury accounts, foreign repo pool, and other deposits) and capital. Liabilities associated with monetary policy instruments (overnight and term reverse repos conducted with private counterparties and term deposits held by depository institutions) are not included. Figure 6: Effective Federal Funds Rate Percent 2.00 Federal Funds Target Range Effective Federal Funds Rate 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 Source: Federal Reserve Bank of New York.