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Confidence in the Implementation of U.S. Monetary Policy Normalization Remarks at the 23rd EMEAP (Executives’ Meeting of East Asia-Pacific Central Banks) Governors’ Meeting Manila, Philippines Simon Potter August 4, 2018 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: Effective Federal Funds Rate (EFFR) and Interest on Reserves (IOR) Percent Target Range IOR EFFR 2.5 2.0 1.5 1.0 0.5 0.0 Oct '15 Apr '16 Oct '16 Apr '17 Oct '17 Apr '18 Source: Federal Reserve Bank of New York; Board of Governors. 1 Figure 2: Cumulative Distribution of Traded Overnight Money Market Rates Fed Funds Percent of Volume Eurodollars Tri-Party Repo 100 Dec. 2017 Mar. 2018 Jun. 2018 75 50 25 0 75 85 95 105 115 125 135 145 155 165 175 185 195 205 215 225 BPS Note: Each period comprises the 10 non-month-end business days following a change to the target range. Distributions represent the volumeweighted 1st, 10th, 20th, 25th, 30th, 40th, 50th, 60th, 70th, 75th, 80th, 90th, and 99th percentile of rates. Dotted line represents the median rate. Dashed lines represent IOR during each period. Source: FR 2420 Report of Selected Money Market Rates; BNYM; Board of Governors. 2 Figure 3: Select Overnight Money Market Rates Percent 2.5 Target Range IOR Overnight Bank Funding Rate (OBFR) Secured Overnight Financing Rate (SOFR) Tri-Party General Collateral Rate (TGCR) 2.0 1.5 1.0 0.5 0.0 Oct '15 Apr '16 Oct '16 Apr '17 Oct '17 Apr '18 Source: Federal Reserve Bank of New York; Board of Governors. 3 Figure 4: Maturity Profile of SOMA Security Holdings Maturity Profile of SOMA Treasury Securities $ Billion $ Billion Reinvestments Redemptions Estimated Reinvestments Estimated Redemptions Redemption cap Projected Redemptions at Year-end 2017 80 70 30 25 Projected Paydown Profile of SOMA Agency Debt and MBS Principal Reinvestments Redemptions Estimated Reinvestments Estimated Redemptions Redemption cap Projected Redemptions at Year-end 2017 60 20 50 15 40 30 10 20 5 10 0 0 Jan '18 Mar '18 May '18 Jul '18 Source: Federal Reserve Bank of New York. Sep '18 Nov '18 Jan '18 Mar '18 May '18 Jul '18 Sep '18 Nov '18 Source: Federal Reserve Bank of New York. 4 Figure 5: Effective Federal Funds Rate and Interest on Reserves Percent Target Range 2.25 IOR EFFR 2.00 1.75 1.50 1.25 1.00 Jan '18 Feb '18 Mar '18 Apr '18 May '18 Jun '18 Source: Federal Reserve Bank of New York; Board of Governors. 5 Figure 6: Cumulative Net U.S. Treasury Bill Issuance Actual $ Billion Industry Estimate 600 500 400 300 200 100 0 -100 -200 Jan '17 May '17 Sep '17 Jan '18 May '18 Sep '18 Source: U.S. Treasury; Wrightson ICAP. 6 Figure 7: Primary Dealer Net Positioning in Treasury Securities $ Billion FRN TIPS Bills Coupons 160 140 120 100 80 60 40 20 0 Jan '17 Apr '17 Jul '17 Oct '17 Jan '18 Apr '18 Source: Federal Reserve Bank of New York. 7 Figure 8: FHLB Tri-Party Repo Volumes and TGCR-EFFR Spread $ Billion TGCR-EFFR Spread (RHS) FHLB Tri-Party Repo Volumes (LHS) 25 Pct. Pts. 0.1 20 0.0 15 10 -0.1 5 0 Sep '17 -0.2 Dec '17 Mar '18 Jun '18 Note: Weekly averages, excludes month-end dates. Source: Federal Reserve Bank of New York. 8 Figure 9: Federal Funds and Eurodollar Trading Volumes at Rates Relative to IOR Percent Volumes at or Below IOR Volumes above IOR 100 75 50 25 0 Sep '17 Oct '17 Nov '17 Dec '17 Jan '18 Feb '18 Mar '18 Apr '18 May '18 Jun '18 Note: Weekly averages. Source: FR 2420 Report of Selected Money Market Rates. 9 Figure 10: Daily Changes in Reserve Balances vs. Daily Changes in IOR-EFFR Spread 1.5 1.0 3Q17-4Q17 Daily Changes in IOR-EFFR Spread, Bps 1Q18 0.5 2Q18 0.0 -0.5 -1.0 -1.5 -100 -80 -60 -40 -20 0 20 40 60 80 100 Daily Changes in Reserve Balances, $ Billion Note: Excludes month-end dates. Reserves exclude GSE balances. Source: Federal Reserve Bank of New York; Board of Governors. 10 Figure 11: Domestic vs. Foreign Borrowing Activity in Federal Funds Market Federal Funds Trading Volumes at Rates Relative to IOR: Average 11/16/17 - 11/22/17 Federal Funds Trading Volumes at Rates Relative to IOR: Average 4/20/18 - 4/26/18 $ Billion $ Billion 50 50 45 Foreign Borrowers 45 Foreign Borrowers 40 Domestic Borrowers 40 Domestic Borrowers 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 -0.11 -0.09 -0.07 -0.05 -0.03 -0.01 Spread to IOR Note: Dashed line is the average EFFR over the period. Source: FR 2420 Report of Selected Money Market Rates. >IOR -0.11 -0.09 -0.07 -0.05 -0.03 -0.01 >IOR Spread to IOR Note: Dashed line is the average EFFR over the period. Source: FR 2420 Report of Selected Money Market Rates. 11 Figure 12: Effective Federal Funds Rate and Median Overnight Eurodollar Rate Percent EFFR Median Overnight Eurodollar Rate 2.00 1.75 1.50 1.25 Jan '18 Feb '18 Mar '18 Apr '18 May '18 Jun '18 Source: Federal Reserve Bank of New York; FR 2420 Report of Selected Money Market Rates. 12 Figure 13: 3-month U.S. Dollar LIBOR and LIBOR-OIS Bps LIBOR (LHS) Bps LIBOR-OIS (RHS) 260 70 240 60 220 50 200 40 180 30 160 20 140 10 120 100 Sep '17 0 Dec '17 Mar '18 Jun '18 Source: Bloomberg L.P. 13 Figure 14: Estimated Cross-Border U.S. Dollar LIBOR-Linked Bank Loans to Non-U.S. Residents $ Billion Maturity > 1y Maturity < 1y 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Developed Offshore Centers Developing Note: Assumes the vast majority of long-term loans have a base rate of LIBOR and that loans with maturity <1-year reprice off of LIBOR, or a close substitute. Source: Bank for International Settlements; Staff Calculations. 14 Figure 15: Taxable U.S. Money Market Mutual Fund Assets Under Management $ Billion Prime Government 3,000 2,500 2,000 1,500 1,000 500 0 Jan '15 Jan '16 Jan '17 Jan '18 Source: Securities and Exchange Commission; Treasury OFR. 15
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