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64 posts on "Fed Funds"

July 08, 2019

From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market



From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market

How do changes in the rate that the Federal Reserve pays on reserves held by depository institutions affect rates in money markets in which the Fed does not participate? Through which channels do changes in the so-called administered rates reach rates in onshore and offshore U.S. dollar money markets? In this post, we answer these questions with the help of an interactive map that guides us through the web of interconnected relationships between the Fed, key market players, and the various instruments in the U.S. dollar funding market, highlighting the linkages across the short-term financial products that form this market.

Continue reading "From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market" »

Posted by Blog Author at 7:00 AM in Banks, Central Bank, Fed Funds, Federal Reserve, Monetary Policy, Repo | Permalink | Comments (5)

May 06, 2019

Selected Deposits and the OBFR



Selected Deposits and the OBFR

The Federal Reserve Bank of New York recently decided to revise the composition of the Overnight Bank Funding Rate (OBFR), a reference rate measuring the cost banks face to borrow overnight in unsecured U.S. dollar-denominated money markets. Specifically, in addition to the federal funds and Eurodollar transactions currently comprising the OBFR, the OBFR now also includes overnight, interest-bearing demand deposits (at rates negotiated between the counterparties and excluding deposits payable on demand) booked within banks’ U.S. offices, known as “selected deposits.” In this post, we discuss the change in more detail, the reason for including selected deposits, and the likely impact on the OBFR’s published values.

Continue reading "Selected Deposits and the OBFR" »

Posted by Blog Author at 7:00 AM in Central Bank, Fed Funds, Federal Reserve, Monetary Policy | Permalink | Comments (0)

March 06, 2019

Assessing the Price Impact of Treasury Market Workups



LSE_2019_Assessing the Price Impact of Treasury Market Workups

The price impact of a trade derives largely from its information content. The “workup” mechanism, a trading protocol used in the U.S. Treasury securities market, is designed to mitigate the instantaneous price impact of a trade by allowing market participants to trade additional quantities of a security after a buyer and seller first agree on its price. Nevertheless, workup trades are not necessarily free of information. In this post, we assess the role of workups in price discovery, following our recent paper in the Review of Asset Pricing Studies (an earlier version of which was released as a New York Fed staff report).

Continue reading "Assessing the Price Impact of Treasury Market Workups" »

Posted by Blog Author at 7:00 AM in Fed Funds, Financial Markets, Liquidity, Treasury | Permalink | Comments (1)

July 11, 2018

Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics



LSE_2018_Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics

As a consequence of the Federal Reserve’s large-scale asset purchases from 2008-14, banks’ reserve balances at the Fed have increased dramatically, rising from $10 billion in March 2008 to more than $2 trillion currently. In that new environment of abundant reserves, the FOMC put in place a framework for controlling the fed funds rate, using the interest rate that it offered to banks and a different, lower interest rate that it offered to non-banks (and banks). Now that the Fed has begun to gradually reduce its asset holdings, aggregate reserves are shrinking as well, and an important question becomes: How does a change in the level of aggregate reserves affect trading in the fed funds market? In our recent paper, we show that the answer depends not just on the aggregate size of reserve balances, as is sometimes assumed, but also on how reserves are distributed among banks. In particular, we show that a measure of the typical trade in the market known as the effective fed funds rate (EFFR) could rise above the rate paid on banks’ reserve balances if reserves remain heavily concentrated at just a few banks.

Note: This analysis provides insight into how the fed funds market might react to changes in the aggregate level of bank reserves. However, as it does not account for all relevant factors, it should not be construed as an analysis of any specific time period. In particular, our analysis does not incorporate the technical adjustment introduced by the FOMC on June 13 that lowered the interest paid on banks' reserves relative to the top of the target range.

Continue reading "Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics" »

Posted by Blog Author at 7:00 AM in Banks, Central Bank, Fed Funds, Monetary Policy | Permalink | Comments (0)

September 30, 2016

From the Vault: Does Forward Guidance Work?



In recent months, there have been some high-profile assessments of how far the Federal Reserve has come in terms of communicating about monetary policy since its “secrets of the temple” days. While observers say the transition to greater transparency “still seems to be a work in progress,” they note the range of steps the Fed has taken over the years to shed light on its strategy, including issuing statements to announce and explain policy changes following Federal Open Market Committee (FOMC) meetings, post-meeting press conferences and minutes, FOMC-member speeches and testimony, and “forward guidance” in all its variants.

Continue reading "From the Vault: Does Forward Guidance Work?" »

Posted by Blog Author at 7:00 AM in DSGE, Expectations, Fed Funds, Forecasting, Household, Inflation, Treasury | Permalink | Comments (2)

August 08, 2016

Restoring Economic Growth in Puerto Rico: Introduction to the Series



LSE_Restoring Economic Growth in Puerto Rico: Introduction to the Series


The difficult economic and financial issues facing the Commonwealth of Puerto Rico have remained very much in the news since our post on options for addressing its fiscal problems appeared last fall. That post was itself a follow-up on a series of analyses, starting with a 2012 report that detailed the economic challenges facing the Commonwealth. In 2014, we extended that analysis with an update where we focused more closely on the fiscal challenges facing the Island. As the problems deepened, we have continued to examine important related subjects ranging from positive revisions in employment data, to the credit conditions faced by small businesses, to understanding emigration, and to considering how the Commonwealth’s public debts stack up. In most of this work, we have focused on how policymakers could help to address the immediate issues facing the Island and its people. The U.S. Congress and the Obama Administration took action in June to provide a framework to help address Puerto Rico’s fiscal crisis. But much remains to be done to address these ongoing problems, which represent a significant impediment to economic growth in the short run. It also seems important to revisit the question of the prospects for reviving longer-run growth in the Commonwealth. These concerns were underscored by projections published by the International Monetary Fund (IMF) in the April edition of the World Economic Outlook that forecast Puerto Rico’s real GDP and population to decline through 2021.

Continue reading "Restoring Economic Growth in Puerto Rico: Introduction to the Series" »

July 11, 2016

How Have High Reserves and New Policy Tools Reshaped the Fed Funds Market?



Over the last decade, the federal funds market has evolved to accommodate new policy tools such as interest on reserves and the overnight reverse repo facility. Trading motives have also responded to the expansion in aggregate reserves as the result of large-scale asset purchases. These changes have affected market participants differently since, for instance, not all institutions are required to keep reserves at the Fed and some are not eligible to earn interest on reserves. Differential effects have changed the profile of participants willing to borrow and lend in this market, and this shift provides an opportunity to study how unconventional policy actions shape participant incentives. In today’s post, we take a detailed look at regulatory filings to identify the main players in today’s fed funds market and understand how their roles have evolved.

Continue reading "How Have High Reserves and New Policy Tools Reshaped the Fed Funds Market?" »

Posted by Blog Author at 7:00 AM in Credit, Fed Funds | Permalink | Comments (0)

July 08, 2016

Hey, Economist! Why—and When—Did the Treasury Embrace Regular and Predictable Issuance?



LSE_Why—and When—Did the Treasury Embrace Regular and Predictable Issuance?

Few people know the Treasury market from as many angles as Ken Garbade, a senior vice president in the Money and Payments Studies area of the New York Fed’s Research Group. Ken taught financial markets at NYU’s graduate school of business for many years before heading to Wall Street to assume a position in the research department of the primary dealer division of Bankers Trust Company. At Bankers, Ken conducted relative-value research on the Treasury market, assessing how return varies relative to risk for particular Treasury securities. For a time, he also traded single-payment Treasury obligations known as STRIPS—although not especially successfully, he notes.

Continue reading "Hey, Economist! Why—and When—Did the Treasury Embrace Regular and Predictable Issuance?" »

June 29, 2016

Monetary Policy Transmission before and after the Crisis



LSE_Monetary Policy Transmission before and after the Crisis

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.

Continue reading "Monetary Policy Transmission before and after the Crisis" »

Posted by Blog Author at 7:00 AM in Crisis, Fed Funds, Financial Markets, Monetary Policy | Permalink | Comments (0)

June 03, 2016

At the N.Y. Fed: The Transatlantic Economy: Convergence or Divergence?



LSE_At the N.Y. Fed: The Transatlantic Economy: Convergence or Divergence?

On April 18, 2016, the New York Fed hosted a conference on current and future policy directions for the linked economies of Europe and the United States. "The Transatlantic Economy: Convergence or Divergence?"—organized jointly with the Centre for Economic Policy Research and the European Commission—brought together U.S. and Europe-based policymakers, regulators, and academics to discuss a series of important issues: Are the economies of the euro area and the United States on a convergent or divergent path? Are financial regulatory reforms making the banking and financial structures more similar? Will this imply a convergence in macroprudential policies? Which instruments do the United States and the euro area have at their disposal to raise investment, spur productivity, and avoid secular stagnation? In this post, we summarize the principal themes and findings of the conference discussion.

Continue reading "At the N.Y. Fed: The Transatlantic Economy: Convergence or Divergence?" »

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Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

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