The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The New York Fed engages with individuals, households and businesses in the Second District and maintains an active dialogue in the region. The Bank gathers and shares regional economic intelligence to inform our community and policy makers, and promotes sound financial and economic decisions through community development and education programs.
Michael Fleming, Frank Keane, Jake Schurmeier, and Emma Weiss
The Federal Reserve lends specific Treasury and agency debt securities held in its System Open Market Account (SOMA)—and accepts general Treasury securities as collateral—through its daily securities lending program. The program supports Treasury and agency debt market function by providing a secondary and temporary source of securities to the broader market through the Fed’s trading counterparties, the primary dealers. Importantly, the size and composition of the SOMA portfolio reflect past monetary policy decisions, limiting the program's ability to help alleviate all collateral shortages. In this post, we provide a brief history of the Fed’s securities lending program and describe recent trends in activity and what is driving them.
Tobias Adrian, Richard Crump, Peter Diamond, and Rui Yu
In a previous post, we showed how market rates on U.S. Treasuries violate the expectations hypothesis because of time-varying risk premia. In this post, we provide evidence that term structure models have outperformed direct market-based measures in forecasting interest rates. This suggests that term structure models can play a role in long-run planning for public policy objectives such as assessing the viability of Social Security.
The Federal Open Market Committee implements monetary policy by raising or lowering its target for the federal funds rate, the interest rate banks charge each other for overnight loans. Because the Federal Reserve has no direct control over most interest rates, it relies on arbitrage in money markets for the change in the fed funds rate to be transmitted to other short-term rates, thus causing all short-term rates to move in tandem. This transmission to other rates is an important first step for the Fed’s actions to influence the real economy. In this post, we describe the major developments that have affected monetary policy transmission since the recent financial crisis. We conclude that while arbitrage may have been impeded at the beginning of the crisis, it currently remains effective in transmitting changes in monetary policy via the money markets.
Sushant Acharya, Ozge Akinci, Julien Bengui, and Bianca De Paoli
Prompted by the U.S. financial crisis and subsequent global recession, policymakers in advanced economies slashed interest rates dramatically, hitting the zero lower bound (ZLB), and then implemented unconventional policies such as large-scale asset purchases. In emerging economies, however, the policy response was more subdued since they were less affected by the financial crisis. As a result, capital flows from advanced to emerging economies increased markedly in response to widening interest rate differentials. Some emerging economies reacted by adopting measures to slow down capital inflows, acting under the presumption that these flows were harmful. This type of policy response has reignited the debate over how to moderate international spillovers.
Credit conditions tightened considerably in the second half of 2015 and U.S. growth slowed. We estimate the extent to which tighter credit conditions last year were responsible for the slowdown using the FRBNY DSGE model. We find that growth would have slowed substantially more had the Federal Reserve not delayed liftoff in the federal funds rate.
China lends to the rest of the world because it saves much more than it needs to fund its high level of physical investment spending. For years, the public sector accounted for this lending through the Chinese central bank’s purchase of foreign assets, but this changed in 2015. The country still had substantial net financial outflows, but unlike in previous years, more private money was pouring out of China than was flowing in. This shift in private sector behavior forced the central bank to sell foreign assets so that the sum of net private and public outflows would equal the saving surplus at prevailing exchange rates. Explanations for this turnaround by private investors include lower returns on domestic investment spending and a less optimistic outlook for China’s currency.
In the third post in this series, we examined GCF Repo® traders’ end-of-day strategies. In this final post, we further our understanding of dealers’ behavior by looking at their trading pattern within the day.
Editors’ note: The original version of this post had the terms “borrowers” and lenders” reversed and had some figures wrong. The corrected figures do not suggest, as before, that dealers who switch between borrowing and lending are pursing collateral swapping strategies. We regret the error. (August 16)
In this post, the third in a series on GCF Repo®, we describe dealers’ trading strategies. We show that most dealers exhibit highly regular strategies, using the GCF Repo service either to borrow or to lend, on net, on almost all the days in which they are active. Moreover, dealers’ strategies are highly persistent over time: Dealers that use GCF Repo to borrow (or to lend) in a given quarter are highly likely to continue to do so in the following quarter. Understanding how dealers trade in the GCF Repo market may provide insight about the role of the repo market more generally and about how recent regulations and market reforms can affect dealers’ trading strategies.
Jacob Adenbaum, David Hubbs, Antoine Martin, and Ira Selig
In this post, we provide a different perspective on the General Collateral Finance (GCF) Repo® market. Instead of looking at the market as a whole, as we did in our previous post , or breaking it down by type of dealer, as we did in this primer, we disaggregate interbank activity by clearing bank and by collateral class. This perspective highlights the most traded collateral and the extent to which dealers at a clearing bank are net borrowers or net lenders. This view of the market is informative given the proposed changes announced recently by the Fixed Income Clearing Corporation.
Jacob Adenbaum, David Hubbs, Antoine Martin, and Ira Selig
In a recent Important Notice, the Fixed Income Clearing Corporation (FICC) announced that it would no longer support interbank trading for its General Collateral Finance Repo Service. (GCF Repo®, hereafter GCF Repo, is a registered service mark of FICC.) But what exactly is the GCF Repo market? And what is interbank GCF Repo specifically? In a series of four posts we take a close look at the GCF Repo market and how it has evolved recently. This first post provides an overview of the GCF Repo market and evaluates its size relative to that of the tri-party repo market as a whole. We also explain what interbank GCF Repo is and show what share of the market it represents.
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