The Transmission of Monetary Policy and the Sophistication of Money Market Fund Investors

Marco Cipriani, Jeff Gortmaker, and Gabriele La Spada

In December 2015, the Federal Reserve tightened monetary policy for the first time in almost ten years and, over the following three years, it raised interest rates eight more times, increasing the target range for the federal funds rate from 0-25 basis points (bps) to 225-250 bps. To what extent are changes in the fed funds rate transmitted to cash investors, and are there differences in the pass-through between retail and institutional investors? In this post, we describe the impact of recent rate increases on the yield paid by money market funds (MMFs) to their investors and show that the impact varies depending on investors’ sophistication.

How Do Large Banks Manage Their Cash?

Jeffrey Levine and Asani Sarkar

Second of two posts

As the aggregate supply of reserves shrinks and large banks implement liquidity regulations, they may follow a variety of liquidity management strategies depending on their business models and the interest rate differences between alternative liquid instruments. For example, the banks may continue to hold large amounts of excess reserves or shift to Treasury or agency securities or shrink their balance sheets. In this post, we provide new evidence on how large banks have managed their cash, which is the largest component of reserves, on a daily basis since the implementation of liquidity regulations.

Large Bank Cash Balances and Liquidity Regulations

Jeffrey Levine and Asani Sarkar

Update (9 a.m.): An earlier version of this post transposed line labels in the first figure. The error has been corrected.

First of two posts

The Federal Open Market Committee (FOMC) has recently communicated its aim to continue implementing monetary policy in a regime that maintains an ample supply of reserves, though with a significantly lower level of reserves than has prevailed in recent years. The liquidity needs of the largest U.S. commercial banks play an important role in understanding the banking system’s appetite for actual reserve holdings, which we refer to as bank reserve demand. In this post, we discuss the recent evolution of large bank cash balances and the effect of liquidity regulations on these balances. In part two of this series, we provide new evidence on how the largest banks manage their liquidity needs on a daily basis.

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

Gara Afonso, Fabiola Ravazzolo, and Alessandro Zori



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.

Understanding Cyber Risk: Lessons from a Recent Fed Workshop

Gara Afonso, Filippo Curti, Ping McLemore, and Atanas Mihov



Cyber risk poses a major threat to financial stability, yet financial institutions still lack consensus on the definition of and terminology around cyber risk and have no common framework for confronting these hazards. This impedes efforts to measure and manage such risk, diminishing institutions’ individual and collective readiness to handle system-level cyber threats. In this blog post, we describe the proceedings of a recent workshop where leading risk managers, academics, and policy makers gathered to discuss proposals for countering cyber risk. This workshop is part of a joint two-phase initiative run by the Federal Reserve Banks of Richmond and New York and the Fed’s Board of Governors to harmonize cyber risk identification, classification, and measurement practices.

Selected Deposits and the OBFR

Alyssa Cambron, Marco Cipriani, Joshua Jones, Romen Mookerjee, Scott Sherman, Brett Solimine, and Timothy Wessel



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.

Global Trends in Interest Rates

Marco Del Negro, Domenico Giannone, Marc Giannoni, Andrea Tambalotti, Brandyn Bok, and Eric Qian



Long-term government bond yields are at their lowest levels of the past 150 years in advanced economies. In this blog post, we argue that this low-interest-rate environment reflects secular global forces that have lowered real interest rates by about two percentage points over the past forty years. The magnitude of this decline has been nearly the same in all advanced economies, since their real interest rates have converged over this period. The key factors behind this development are an increase in demand for safety and liquidity among investors and a slowdown in global economic growth.

Stressed Outflows and the Supply of Central Bank Reserves

Ryan Bush, Adam Kirk, Antoine Martin, Philip Weed, and Patricia Zobel



Since the financial crisis, banking regulators around the world have been intensely aware of liquidity risk and, in part as a response, have introduced the Basel III liquidity regulation. Today, the world’s largest banks hold substantial liquidity buffers comprising both securities and central bank reserves, to satisfy internal liquidity stress tests and minimum quantitative regulatory requirements. The appropriate level of liquidity buffers depends on the likely outflows in a market stress situation. In this post, we use public data to provide a rough estimate of stressed outflows that the largest banks would face and consider how they could meet these outflows.

Did Banks Subject to LCR Reduce Liquidity Creation?

Daniel Roberts, Asani Sarkar, and Or Shachar



Banks traditionally provide loans that are funded mostly by deposits and thereby create liquidity, which benefits the economy. However, since the loans are typically long-term and illiquid, whereas the deposits are short-term and liquid, this creation of liquidity entails risk for the bank because of the possibility that depositors may “run” (that is, withdraw their deposits on short notice). To mitigate this risk, regulators implemented the liquidity coverage ratio (LCR) following the financial crisis of 2007-08, mandating banks to hold a buffer of liquid assets. A side effect of the regulation, however, is a reduction in liquidity creation by banks subject to LCR, as we find in our recent paper.

How Do the Fed’s MBS Holdings Affect the Economy?

Antoine Martin and Sam Schulhofer-Wohl



In our previous post, we discussed the meaning of the term “credit allocation” and how it relates to the Federal Reserve’s holdings of agency mortgage-backed securities (MBS). We concluded that the Fed’s MBS holdings do not pose significant credit risk but that the Fed does influence the relative market price of credit when it purchases agency MBS, and this indirectly influences decisions by investors. Today, we take the next step and discuss how the Fed’s MBS purchases affect the U.S. economy and, in particular, how the effect of MBS purchases can differ from the effect of purchases of Treasury securities.