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Monetary Policy Implementation with Ample Reserves

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Abstract

The Federal Reserve currently implements its interest rate policy under a framework known as the floor system. In order for the floor system to operate smoothly, there must be sufficient liquidity in the federal funds market. The ongoing goal of quantitative tightening (QT) is to reach the minimal level of market liquidity required to implement monetary policy efficiently and effectively, also known as an ample reserves regime. We briefly discuss changes in the monetary policy framework from the previous corridor system to today’s floor system as well as the circumstances that brought them about. Finally, this article complements the literature by proposing that liquidity changes in the composition of bank deposits since the COVID-19 pandemic, paired with modifications in savings account regulation, play an important role in increasing the demand for bank reserves, thus raising the threshold for what may be considered ample. A simple econometric analysis confirms our conjecture. Therefore, the composition of bank deposits should be considered when performing QT policy.

Suggested Citation

  • YiLi Chien & Ashley Stewart, 2025. "Monetary Policy Implementation with Ample Reserves," Review, Federal Reserve Bank of St. Louis, vol. 107(8), pages 1-11, May.
  • Handle: RePEc:fip:fedlrv:100054
    DOI: 10.20955/r.2025.08
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    Keywords

    monetary policy; floor system; federal funds market; quantitative tightening; ample reserves regime;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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