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When Are Central Bank Reserves Ample?

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Abstract

The Federal Reserve (Fed) implements monetary policy in a regime of ample reserves, whereby short-term interest rates are controlled mainly through the setting of administered rates. To do so, the quantity of reserves in the banking system needs to be large enough that everyday changes in reserves do not cause large variations in the policy rate, the so-called federal funds rate. As the Fed shrinks its balance sheet following the plan laid out by the Federal Open Market Committee (FOMC) in 2022, how can it assess when to stop so that the supply of reserves remains ample? In the first post of a two-part series, based on the methodology developed in our recent Staff Report, we propose to assess the ampleness of reserves in real time by estimating the slope of the reserve demand curve.

Suggested Citation

  • Gara Afonso & Domenico Giannone & Gabriele La Spada & John C. Williams, 2024. "When Are Central Bank Reserves Ample?," Liberty Street Economics 20240813, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:98660
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    Keywords

    ample reserves; monetary policy; early-warning signals;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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