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Federal Reserve tools for managing rates and reserves

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Author Info

  • Antoine Martin
  • James McAndrews
  • Ali Palida
  • David Skeie

Abstract

Monetary policy measures taken by the Federal Reserve as a response to the 2007-09 financial crisis and subsequent economic conditions led to a large increase in the level of outstanding reserves. The Federal Open Market Committee (FOMC) has a range of tools to control short-term market rates in this situation. We study several of these tools, namely, interest on excess reserves (IOER), reverse repurchase agreements (RRPs), and the term deposit facility (TDF). We find that overnight RRPs (ON RRPs) may provide a better floor on rates than term RRPs because they are available to absorb daily liquidity shocks. Whether the TDF or RRPs best support equilibrium rates depends on the intensity of interbank monitoring costs versus balance sheet costs, respectively, that banks face. In our model, using the RRP and TDF concurrently may most effectively stabilize short-term rates close to the IOER rate when such costs are rapidly increasing.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 642.

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Date of creation: 2013
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Handle: RePEc:fip:fednsr:642

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Related research

Keywords: Federal Open Market Committee ; Monetary policy ; Bank reserves ; Bank liquidity ; Interest rates ; Repurchase agreements;

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  1. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
  2. Anil K. Kashyap & Jeremy C. Stein, 2012. "The Optimal Conduct of Monetary Policy with Interest on Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 266-82, January.
  3. Todd Keister & James J. McAndrews, 2009. "Why are banks holding so many excess reserves?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Dec).
  4. Huberto M. Ennis & Todd Keister, 2008. "Understanding monetary policy implementation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 235-263.
  5. Todd Keister & Antoine Martin & James McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
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