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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.

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  • 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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    1. Gara Afonso & Marco Cipriani & Adam Copeland & Anna Kovner & Gabriele La Spada & Antoine Martin, 2021. "The Market Events of Mid-September 2019," Economic Policy Review, Federal Reserve Bank of New York, vol. 27(2), pages 1-26, August.
    2. Huberto M. Ennis & David A. Price, 2020. "Understanding Discount Window Stigma," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue 20-04, pages 1-5, April.
    3. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
    4. Jonathan H. Wright, 2022. "The Extent and Consequences of Federal Reserve Balance Sheet Shrinkage," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 53(2 (Fall)), pages 259-275.
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    Keywords

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; 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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