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The Fed Has Two Tools to Influence Money Market Conditions

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Abstract

The Federal Reserve’s 2022-23 tightening cycle involved the use of two monetary policy tools: changes in administrative rates and changes in the size of its balance sheet. This post highlights the results of a recent Staff Report that explores how these tools affect money market conditions. Using confidential trade-level data, we find that both tools have significant effects on the pricing of funds sourced through repo. These results suggest that the Fed can manage how financing conditions are affected even as it influences economic conditions. For example, the Fed can lower its administrative rates to loosen economic conditions, while shrinking its balance sheet to maintain financing conditions in the money markets.

Suggested Citation

  • Adam Copeland & Owen Engbretson, 2026. "The Fed Has Two Tools to Influence Money Market Conditions," Liberty Street Economics 20260406, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:103002
    DOI: 10.59576/lse.20260406
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    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • 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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