Change from scarcity to too much

Ihrig, Jane E., Ellen E. Meade, and Gretchen C. Weinbach (2016). "The Federal Reserve's New Approach to Raising Interest Rates," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, February 12, http://dx.doi.org/10.17016/2380-7172.1706.

The Fed’s approach to rise/low the interest rate.

The banks and other depository institutions have changed their demand for the Fed’s supply of reserve balance after the financial crisis.

• depository institutions hold accounts in Fed

• Before the global financial crisis, the FOMC announced its target for the federal funds rate and the Open Market Desk at the Federal Reserve Bank of New York (the "Desk") achieved it by shifting the supply of reserves through open market operations.

  • In particular, and as shown in figure 1, for a given estimate of the demand for reserve balances, the Desk would adjust the quantity of reserve balances in order to hit the FOMC's target federal funds rate.
  • The federal funds rate has historically been highly correlated with other short-term interest rates, and so a change in the FOMC's federal funds rate target would pass through to other short-term market interest rates, and thereby also affect longer-term financial conditions and the real economy.

  

The story is that, after achieving the targeted credit rate, the curve in figure achieves very flat. Such reserves (over $2.6T) make it hard for the federal reserve to achieve its targeted FFR by shifting a small range of supply of the reserves.

Then the the Fed implement a targeted range. We often call it a corridor.

So how did the Fed implement the FOMC's increase in the target range in December? Instead of adjusting the quantity of reserves, the new framework that the Fed is using to implement the FOMC's monetary policy primarily involves adjusting prices-- that is, interest rates.

• The Fed now sets two administered rates

  • interest on excess reserves (IOER,准备金利率)
    • primary policy tool
    • earned by banks on their reserve balances
    • the rate puts upward pressure on short term interest rates as banks have little incentive to lend funds below this rate
  • offering rate on overnight reverse repurchase agreement (ON RRPs 隔夜逆回购利率)
    • helps to support short term interest rates. This is the rate the the central banks lend money to non bank institutions
    • nonbank institutions have little incentive to lend funds below the rate.
    • It has the same logic as IORB
    • Also called Sub-Floor System

• Each rate encourages arbitrage in money market, each acts as a reservation rate.

ONRRP, IOR and EFFR

Effective federal funds rate (EFFR)

Volume weighted median of overnight federal funds transactions reported in FR2420 report of Selected Money Market Rates.

（各家银行隔夜拆借利率的中位数）