For release on delivery
5:00 p.m. EDT
March 27, 2023
Implementation and Transmission of Monetary Policy
Remarks by
Philip N. Jefferson
Member
Board of Governors of the Federal Reserve System
at the
H. Parker Willis Lecture
Washington and Lee University
Lexington, Virginia
March 27, 2023
Thank you very much for inviting me to be part of the H. Parker Willis Lecture
Series. As you know, Dr. Willis was a distinguished professor here at Washington and
Lee University. Among many other accomplishments, he helped create the Federal
Reserve System. He served as the first secretary to the Federal Reserve Board from 1914
to 1918 and later as the first research director.
Before I go further, let me remind you that the views I will express today are my
own and are not necessarily those of my colleagues in the Federal Reserve System.
Many discussions of monetary policy simply talk about the Federal Reserve
setting the federal funds rate to promote our goals of maximum employment and price
stability, without giving attention to the specific actions we take to put the federal funds
rate where we want it-that is, to the way we implement monetary policy. And even in
economics classes that cover this topic, the teaching materials have not always caught up
with the fact that we have purposely changed our implementation framework over the
past decade.1 My colleagues at the Fed are working with educators to close the
curriculum gap, and I hope this lecture will further help this endeavor.2
In honor of Dr. Willis's important contributions to the design and creation of the
Federal Reserve, today I would like to talk to you about how the Fed currently uses a
specific set of tools to implement monetary policy and how monetary policy is
transmitted to the economy. Then, I will offer some concluding remarks.
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The Federal Funds Market and the Fed's Policy Target Range
As mandated by the U.S. Congress, the Federal Open Market Committee's
(FOMC) objectives are to promote maximum employment and price stability. The
members of the Board of Governors and the presidents of the 12 Federal Reserve Banks
constitute the FOMC. The FOMC gathers for eight regularly scheduled meetings each
year to discuss economic and financial conditions and to deliberate on monetary policy.
In each meeting, the FOMC establishes a target range for the federal funds rate. Figure 1
shows the upper bound in red and the lower bound in blue of the federal funds target
range since 2015. We see the range increasing in 2018 as the job market was
strengthening and inflation was moving up toward 2 percent. That's right-for much of
the decade before then, the inflation rate was below 2 percent. In March 2020, when the
COVID-19 pandemic hit the economy, the FOMC quickly moved the target range down
to near zero to support economic activity.
Once monetary policy is set, the Fed implements monetary policy by using its
policy tools to ensure that the federal funds rate (FFR) stays within the range. The
effective federal fund rate is determined by market forces. It is a volume-weighted
median of federal funds rates across all borrowers each day. In figure 1, you can see that
the Fed has been able to implement monetary policy in such a way that the effective
federal funds rate (EFFR), the black line in the figure, has indeed stayed within the target
rate range most of the time.
To understand how the Fed's tools work, it is important to understand the federal
funds market. It is a market where depository institutions borrow funds overnight from
certain financial institutions, including other depository institutions and government-
- 3 -
sponsored enterprises. These loans are uncollateralized, and the interest rate or cost of
the loans is the federal funds rate, which is determined by the supply and demand for
reserve balances that financial institutions hold in their "checking accounts" at the Fed.3
The Fed can change the total amount of reserves available to the banking system through
open market operations or its lending programs. Since the Fed controls the supply of
reserves and the amount that it supplies is independent of the interest rate, the supply of
reserves is illustrated as a vertical line in the stylized supply and demand curves shown in
figure 2.4 Later, I will explain why this supply curve intersects the demand curve, as
shown in figure 2.
The demand curve for reserves in figure 2 has three segments. The top portion of
the demand curve is capped by the discount rate that the Fed sets. The middle of the
curve is downward sloping, like most demand curves. The higher the interest rate or cost
to borrow, the lower the quantity of reserves demanded. The bottom portion is nearly flat
because, at some point, banks do not find much benefit from holding additional reserves
other than earning the interest on reserve balances (IORB) rate from the Fed. In other
words, banks prefer to earn money by making loans to consumers and businesses or
purchasing securities only if doing so generates a higher return. In what follows, I will
go deeper into the top and bottom segments of the demand curve.
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Implementation Tool 1: Discount Window Rate Sets a Ceiling
At the top of the demand curve, we see the discount rate, which is the interest rate
the Fed charges when it lends money to banks.5 The discount rate is an administered
rate, or a rate set by the Fed, and it is one of the tools the Fed uses to implement monetary
policy. It sets a ceiling for the federal funds rate because banks, if they are in good
standing and have collateral for the discount window loan, can always borrow overnight
funds at the discount rate from the Fed. Therefore, they are not willing to pay a higher
rate to borrow funds.
In practice, however, banks have demonstrated, in the absence of stress, some
reluctance to borrow from the discount window. They are concerned that borrowing
from the Fed may indicate that the bank is unable to borrow from other financial
institutions, and that it sends a negative signal about their financial condition to the
world.6 Such dynamics are referred to as the "stigma" associated with the use of the
discount window.7 Stigma dampens the discount rate's effectiveness as a day-to-day tool
the Fed can use to implement monetary policy. Thus, alternative implementation tools
are required. This brings me to the next rate I want to talk to you about, the interest rate
on reserve balances.
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Implementation Tool 2: Interest on Reserve Balances
Close to the bottom of the demand curve is the interest on reserve balances rate
denoted by IORB rate in figure 2. This is the interest rate the Fed pays on reserves
eligible institutions keep at Federal Reserve Banks.8 This interest rate is the primary tool
the Fed uses currently to implement monetary policy.9 In the graph, observe that the
federal funds rate is close to this rate. The economic force that keeps these two rates
close to each other is called arbitrage, the simultaneous purchase and sale of funds (or
goods) to profit from a difference in price. Arbitrage keeps prices of financial
instruments with similar payoffs close to each other.10 I will illustrate how arbitrage
works with an example that makes it clear why the federal funds rate cannot be much
lower nor much higher than the interest on reserve balances rate.
Arbitrage Keeps Rates Close to Each Other
Let's assume that the federal funds rate is 4 percent and the interest on reserves
is 4.5 percent. Banks will quickly realize that they can borrow funds in the federal funds
market at 4 percent and deposit those funds at the Fed and earn the interest on reserve
8
Section 19(b)(2) of the Federal Reserve Act requires each depository institution to maintain reserves
against certain liabilities of the bank. The Board's Regulation D (Reserve Requirements of Depository
Institutions in title 12, part 204, of the Code of Federal Regulations) implements the reserve requirements
provisions in section 19. Eligible institutions include depository institutions and certain other institutions
as specified in the act; see the definition in 12 C.F.R. § 204.2 at
https://www.ecfr.gov/current/title12/chapter-II/subchapter-A/part-204/section-204.2#p-204.2(y).
9
On October 6, 2008, the Fed started to pay interest on reserves of eligible institutions with master
accounts at Federal Reserve Banks. Up to and including July 28, 2021, interest was paid on required
reserves at an IORR (interest on required reserves) rate and at an IOER (interest on excess reserves) rate.
The IORR rate was paid on balances maintained to satisfy reserve balance requirements, and the IOER rate
was paid on excess balances. Effective March 24, 2020, the Board amended Regulation D to set all reserve
requirement ratios for transaction accounts to 0 percent, eliminating all reserve requirements. As a result,
there is no longer a need to describe interest rates based on whether the balance satisfies a reserve balance
requirement. To account for those changes, the Board approved a final rule amending Regulation D to
replace references to an IORR rate and to an IOER rate with references to a single IORB rate.
10
This idea is called the law of one price, and it assumes that markets are competitive-that is, investors
cannot manipulate prices to their advantage-and the absence of trade restrictions and trading costs.
- 6 -
balances rate of 4.5 percent, which means that they can earn a profit of 0.5 percent (the
difference between the two rates).11 This riskless investment strategy is called an
arbitrage opportunity. As long as this arbitrage opportunity exists, banks will borrow
funds in the federal funds market and deposit those funds at the Fed, putting upward
pressure on the federal funds rate. This upward pressure will continue until the federal
funds rate rises to a level close to the interest on reserves and the arbitrage opportunity no
longer exists.
A similar logic applies when the federal funds rate is much higher than the
interest on reserves.12 If this is the case, banks can make money by withdrawing funds
from their "checking account" at the Fed and lending that money at the higher federal
funds rate. More banks willing to lend money in the federal funds market will put
downward pressure on the federal funds rate, causing the federal funds rate to decline
toward the interest rate on reserves.
Implementation Tool 3: Overnight Reverse Repurchase Agreement
So far, I have talked about two of the Fed's administered rates; the discount rate,
and the interest on reserve balances rate. Now, I will talk about the third key
administered rate, the overnight reverse repurchase agreement rate denoted by ON RRP
in figure 2. Not all institutions that lend money in the federal funds market and who are
key players in short-term money markets are eligible to receive interest on reserves.
Consider, for example, Federal Home Loan Banks. They were set up in the 1930s to
support mortgage lending. Today, they manage about $1.5 trillion in assets. They are
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major lenders in the federal funds market, but they are ineligible to receive interest on
reserves. Therefore, they may have an incentive to lend funds at a much lower rate than
the interest rate on reserves rather than earn zero interest on idle cash balances. To
ensure that these and other institutions do not charge an interest rate much lower than the
interest rate on reserves, the Fed uses an overnight reverse repurchase agreement facility
as a supplementary policy tool to help control the federal funds rate.13
This facility is open to a broad set of financial institutions, including money
market funds (MMFs), government-sponsored enterprises, and banks that are active in
financial markets where short-term interest rates are determined. At this facility,
institutions agree to buy a Treasury security from the Fed and sell it back the next day. In
return, the Fed pays the institution the overnight reverse repurchase rate.14 Even though
this transaction seems complicated, it is similar to banks depositing reserves at the Fed
and receiving interest on them. This transaction, illustrated on slide 5, is equivalent to
financial institutions depositing cash at the Fed and the Fed giving them a Treasury
security as collateral, paying them the overnight reverse repurchase rate on the deposit,
and agreeing to buy back the security the next day.
This facility sets a floor for the federal funds rate because not only banks, but
other financial institutions can always earn the overnight reverse repurchase agreement
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rate when lending money to the Fed.15 In other words, the interest rate at this facility
serves as a reservation rate, or the lowest rate lenders are willing to accept for lending out
their cash.
Ample Reserves
As I mentioned earlier, the federal funds rate is determined by borrowers and
lenders. In figure 3, it is the point where supply and demand intersect. In this figure,
notice that the supply curve is off to the right and it intersects the flat part of the demand
curve. This is on purpose because we are currently in what we call an ample-reserves
environment.16 In this environment, the Fed is supplying an "ample" level of reserves to
the banking system, and small movements in the supply curve will not affect the
equilibrium federal funds rate much. Instead, as I mentioned earlier, the key tool the Fed
uses to implement monetary policy is the interest rate on reserves balances. In figure 3,
you can see that by moving the interest rate on reserves down, the Fed shifts the demand
for reserves down and affects the federal funds rate even if the demand curve is flat.17 A
similar mechanism follows by moving the rate up. As suggested by the graph, the FOMC
15
For banks eligible to receive the IORB rate, the IORB rate is their reservation rate, and it explains why
the federal funds market is currently dominated by nonbank lenders with the EFFR remaining below the
IORB rate.
16
In January 2019, the Fed announced that "the Committee intends to continue to implement monetary
policy in a regime in which an ample supply of reserves ensures that control over the level of the federal
funds rate and other short-term interest rates is exercised primarily through the setting of the Federal
Reserve's administered rates, and in which active management of the supply of reserves is not required."
See Board of Governors (2019a, para 2). Afonso and others (2022), among others, investigate how to
identify ample-reserves regimes.
17
In periods when reserves are ample, there might be an increase in overnight reverse repurchase activity
following an increase in reserve supply because nonbank financial institutions absorb liquidity that banks
find costly to hold on their balance sheet because of regulatory capital rules. If a prime MMF lends money
to a bank in the federal funds market instead of lending it money in the ON RRP facility, the bank increases
its liabilities (borrowing from the prime MMF) and assets (reserves), which expands its balance sheet. It
will affect the banks' various regulatory ratios and count toward calculating the Federal Deposit Insurance
Corporation fee.
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is mindful about adjusting its other administered rates in sync with the interest rate on
reserve balances. This practice helps ensure arbitrage works to shift the demand curve as
indicated.
Implementation Tool 4: Open Market Operations
So far, I have talked about how the Fed influences the demand curve by changing
its administered rates. Now, I will talk about how the Fed shifts the supply of reserves in
the system. It does so by buying or selling securities, so-called open market operations.
When the Fed purchases securities, it pays for them by depositing cash into the
appropriate banks' reserve balance accounts, adding to the overall level of reserves (cash)
in the banking system.
Before 2008, open market operations were the Fed's primary monetary policy tool
because there were limited reserves in the banking system, a so-called scarce-reserves
regime. In a scarce-reserves environment, the supply curve intersects the demand curve
on the downward-sloping part of the demand curve, as illustrated in the left panel of
figure 4. Open market operations are the tool old textbooks emphasize. The Fed would
inject or drain reserves through open market operations to keep the vertical supply curve
at the desired location-where it intersects the demand curve at the intended federal
funds rate. Since the supply of reserves naturally changes-for example, because of the
withdrawal of reserves into physical currency-the Fed conducted these operations
frequently. Today, being in an ample-reserves regime, the Fed operates on a different
segment of the demand curve and uses different tools, as illustrated in the right panel of
figure 4.
Technical Adjustments to the Supply of Reserves: A Case Study
Although active management of the supply of reserves is not, by design, a feature
of an ample-reserves regime, there are times when the Fed may take steps to adjust the
supply of reserves to support interest rate control. For example, in mid-September 2019,
strains in funding markets emerged as quarterly corporate tax payments and the
settlement of Treasury securities coincided and resulted in a large amount of cash being
drained from short-term interest rate investments. In fact, reserve balances fell more than
$100 billion over just two days. Although the drain in reserves associated with seasonal
tax payments was expected to put some upward pressure on short-term interest rates, the
increases in rates that materialized were exceptionally large by historical standards. One
such interest rate is the Secured Overnight Financing Rate, a broad measure of the cost of
borrowing cash overnight collateralized by Treasury securities. As shown in figure 5, the
blue dashed line denoted as SOFR spiked, and the effective federal funds rate, the red
solid line, moved 5 basis points above the target range during this episode.
In response to these market developments the Fed undertook open market
operations to purchase securities to add reserves temporarily. Specifically, the Fed
conducted repurchase agreement (repo) transactions to provide immediate liquidity to the
market and help alleviate the funding strains, ensuring the federal funds rate resumed
trading within the target range. In addition, the FOMC judged that the prevailing level of
reserve supply at that time may have been a bit too low to be consistent with operating in
an ample-reserves regime. Accordingly, in early October 2019, the FOMC directed the
Fed to maintain over time reserve balances at least as large as the level that had prevailed
in "early September," a time when there were no evident pressures in money markets.18
The Fed's Balance Sheet
The Fed's balance sheet contains a great deal of information about the scale and
scope of its open market operations. Figure 6 shows the evolution of the Fed's balance
sheet, where the holdings of U.S. Treasury securities, agency mortgage-backed securities
(MBS), and other securities are recorded as assets and reserve balances are recorded as
liabilities. Both series are divided by gross domestic product because the Fed's balance
sheet should naturally increase over time with economic growth. We entered the ample-
reserves regime in 2008, during the 2007-09 financial crisis, as the Fed sharply increased
its total assets. In 2020, during the COVID-19 pandemic, there was another sharp
increase in total assets. In both instances, the Fed reduced its interest rate target near zero
and purchased securities, injecting reserves into the banking system. The effect of
purchasing securities was to reduce longer-term interest rates to support the economy.
The expansion of the Fed's balance sheet is popularly known as quantitative easing (QE).
When QE ended, the Fed reinvested any maturing securities it held to maintain the size of
the balance sheet. Now, the Fed is fighting inflation by raising its interest rate target
range and is in the process of shrinking the Fed's balance sheet, which is referred to as
quantitative tightening (QT), by passively stopping the reinvestment in some maturing
Treasury securities and agency mortgage-backed securities (MBS).19
Summary of Tools
I've talked about how the Fed has four tools in its toolbox to implement monetary
policy. Three of the tools and their associated administered rates, shown in green text on
slide 10, are used to steer the market-determined federal funds rate into the FOMC's
target range. These tools also interact with other short-term market interest rates through
arbitrage relationships. The fourth tool, shown in blue text, is open market operations-
the purchase and sale of government securities-which is used to adjust the supply of
reserves in the banking system.
Monetary Policy Transmission
Now that you understand the Fed's implementation tools, let's see how the Fed
uses them to achieve its two mandated goals: maximum employment and price stability.
Currently, the unemployment rate is low, and the inflation rate is above the Fed's
2 percent target. Beginning in the second half of 2021, as the magnitude and persistence
of the increase in inflation became clearer and as the job market recovery accelerated, the
FOMC pivoted toward a tighter stance of monetary policy. In March 2022, the FOMC
increased its target range for the federal funds rate, for the first time since the onset of the
pandemic. In June 2022, we began the process of significantly reducing the size of our
balance sheet, after announcing our plans in May.
Monetary policy is transmitted to the rest of the economy by affecting financial
market prices, such as long-term interest rates, which in turn affect the decisions of
households and businesses. Previously, I discussed how changes in the federal funds
target range are transmitted to short-term interest rates, such as the overnight reverse repo
rates, through arbitrage relationships. Short-term interest rates, in turn, affect long-term
interest rates through investors' expectations. More specifically, according to the
expectations theory of the term structure of interest rates, intermediate- and long-term
interest rates are the weighted average of expected future short-term interest rates.20 In
addition, monetary policy affects risk premiums. Tighter monetary policy tends to reduce
the willingness of investors to bear risk, making them less willing to invest in long-term
assets, which means that their return (interest rate) must increase for investors to buy
these assets.21
Figure 7 illustrates how long-term interest rates, which are widely viewed as
important for businesses' and households' economic decisions, move in anticipation of
changes in the federal funds rate. The red line is the average 10-year triple-B corporate
bond rate. It is a measure of corporate borrowing costs. The blue line is the average 30-
year mortgage rate. It is a measure of household borrowing costs. Notice that both
measures increased in early 2022 in response to Fed communications and in anticipation
of increases in the effective federal funds rate, the black line. Higher long-term interest
rates increase the cost of borrowing money for households and businesses. Therefore,
high interest rates raise the incentive to save, which in turn dampens consumer spending
on interest rate-sensitive expenditures, like housing and automobiles, and slows
businesses' investment in new equipment. The decrease in spending decreases the
20
Strictly speaking, the expectations theory states that long-term interest rates are entirely governed by the
expected future path of short-term interest rates. While this theory has strong implications that have been
rejected in many studies, it nonetheless contains important elements of truth. For a review of the empirical
evidence and implications, please see King and Kurmann (2002).
21
Bernanke and Kuttner (2005), Hanson and Stein (2015), and Gertler and Karadi (2015), among others,
highlight that monetary policy affects risk premiums. Policy tightening tends to reduce the willingness of
investors to bear risk-for example, by reducing expected levels of consumption (Campbell and Cochrane,
1999). If policy tightens in response to inflationary shocks, term premiums also tend to rise as
longermaturity bonds become riskier (Piazzesi and Schneider, 2006). Policy tightening can also lower stock
prices by increasing the expected equity premium-for example, by weakening the balance sheet of
leverage firms and making their stocks riskier.
overall demand for goods and services in the economy, thereby reducing the
demand/supply imbalances we have seen, and, consequently, reduce inflationary
pressures. As a result, the inflation rate should fall back toward 2 percent, the FOMC's
inflation rate target.
A key question is how much the tightening of financial conditions since late 2021
has contributed to reducing aggregate demand and inflationary pressures. In figure 8,
you can see that inflation, measured using the personal consumption expenditures price
index, has started to come down. Some of the disinflation, or reduction in the inflation
rate, is due to monetary policy tightening, and some of this disinflation is due to other
factors, such as supply chain bottlenecks easing and falling energy prices. Chair Powell
and other colleagues in the Federal Reserve System have pointed out that monetary
policy affects the economy and inflation with long, variable, and highly uncertain lags,
and we are still learning about the full effect of our tightening thus far.22
Conclusion
In conclusion, the Fed has a congressional mandate of maximum employment and
price stability. The FOMC conducts monetary policy by setting the target range for the
federal funds rate. Then, the Fed uses its monetary policy tools to implement the policy,
which guides market interest rates toward the Fed's desired setting of policy. The Fed
implements monetary policy using administered rates. The interest rate on reserve
balances is the Fed's primary tool for adjusting the federal funds rate. The overnight
reverse repurchase agreement facility is a supplementary tool that sets a floor for the
federal funds rate. The discount rate serves as a ceiling for the federal funds rate. The
Fed ensures that the banking system has ample reserves, using open market operations, if
needed. Currently, we are tightening monetary policy. Changes in the federal funds rate
are transmitted to other interest rates through arbitrage and by affecting investors'
expectations. Changes in interest rates affect the decisions of consumers and businesses
with a lag. Their decisions ultimately move the economy toward maximum employment
and price stability.
Thank you.
References
Afonso, Gara, Domenico Giannone, Gabriele La Spada, and John C. Williams (2022).
"Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve Demand
Curve," Staff Report 1019. New York: Federal Reserve Bank of New York,
May,
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1019.pd
f.
Bernanke, Ben S., and Kenneth N. Kuttner (2005). "What Explains the Stock Market's
Reaction to Federal Reserve Policy?" Journal of Finance, vol. 60 (June), pp.
1221-57.
Board of Governors of the Federal Reserve System (2018). "Overnight Reverse
Repurchase Agreement Facility," webpage, January 3,
https://www.federalreserve.gov/monetarypolicy/overnight-reverse-repurchaseagreements.htm.
--- (2019a). "Statement Regarding Monetary Policy Implementation and Balance
Sheet Normalization," press release, January 30,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.ht
m.
--- (2019b). "Statement Regarding Monetary Policy Implementation," press release,
October 11,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20191011a.ht
m#:~:text=%22Effective%20October%2015%2C%202019%2C,3%2F4%20to%2
02%20percent.
--- (2022). "Discount Window Lending," webpage, December 30,
https://www.federalreserve.gov/regreform/discount-window.htm.
--- (2023). "Bank Term Funding Program," webpage, March 16,
https://www.federalreserve.gov/monetarypolicy/bank-term-funding-program.htm.
Campbell, John Y., and John H. Cochrane (1999). "By Force of Habit: A Consumption-
Based Explanation of Aggregate Stock Market Behavior," Journal of Political
Economy, vol. 107 (April), pp. 205-51.
Carlson, Mark, and Jonathan D. Rose (2017). "Stigma and the Discount Window,"
FEDS Notes. Washington: Board of Governors of the Federal Reserve System,
December 19,
https://www.federalreserve.gov/econres/notes/feds-notes/stigmaand-the-discount-window-20171219.html.
Federal Reserve Bank of New York (2023). "FAQs: Reverse Repurchase Agreement
Operations," webpage, February 22,
https://www.newyorkfed.org/markets/rrp_faq.html.
Gertler, Mark, and Peter Karadi (2015). "Monetary Policy Surprises, Credit Costs, and
Economic Activity," American Economic Journal: Macroeconomics, vol. 7
(January), pp. 44-76.
Hanson, Samuel G., and Jeremy C. Stein (2015). "Monetary Policy and Long-Term Real
Rates," Journal of Financial Economics, vol. 115 (March), pp. 429-48.
Ihrig, Jane, and Scott Wolla (2022a). Interview by Adrian Ma and Darian Woods, "AP
Macro Gets a Makeover," The Indicator from Planet Money, NPR, August 15,
https://www.npr.org/transcripts/1117599828.
Ihrig, Jane, and Scott Wolla (2022b). "Let's Close the Gap: Updating the Textbook
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https://doi.org/10.1080/00220485.2022.2075509.
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Reserves' Approach to Implementing Monetary Policy," Finance and Economics
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https://doi.org/10.17016/FEDS.2020.022.
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Rate Control, and Quantitative Tightening," Working Paper.
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Implementation and
Transmission of
Monetary Policy
Philip N. Jefferson
Governor, Federal Reserve Board
H. Parker Willis Lecture at Washington and Lee University,
March 27, 2023
Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open
Market Committee or the Federal Reserve System.
Roadmap for the Lecture
• How the Fed currently uses a specific set of
tools to implement monetary policy
• How monetary policy is transmitted to the
economy
• Concluding remarks

Figure 2: Stylized Supply and Demand Curves for
Reserves in the Federal Funds Market
Note: FFR is federal funds rate. IORB is interest rate on reserve balances. ON RRP is overnight reverse
repurchase agreement.
Source: Figure 2 in Jane Ihrig and Scott Wolla (2022), "Let's Close the Gap: Updating the Textbook
Treatment of Monetary Policy," Journal of Economic Education, vol. 53 (3), pp. 232-49.
Source: Figure 3 in Jane Ihrig, Zeynep Senyuz, and Gretchen Weinbach (2020), "The Fed's
'AmpleReserves' Approach to Implementing Monetary Policy," Finance and Economics Discussion Series
2020022 (Washington: Board of Governors of the Federal Reserve System, February),
https://doi.org/10.17016/FEDS.2020.022.
Figure 3: Fed lowers the Federal Funds Rate by Decreasing
Administered Rates
Note: The blue dot indicates the previous equilibrium federal funds rate, and the red square indicates the
new equilibrium federal funds rate. FFR is federal funds rate. IORB is interest rate on reserve balances. ON
RRP is overnight reverse repurchase agreement.
Source: Figure 4 in Jane Ihrig and Scott Wolla (2022), "Let's Close the Gap: Updating the Textbook
Treatment of Monetary Policy," Journal of Economic Education, vol. 53 (3), pp. 232-49.
Figure 4: Graphical Comparison of Scarce-Reserves Regime
(left panel) and Ample-Reserves Regime (right panel)
Scarce-reserves regime Ample-reserves regime
Note: FFR is federal funds rate. IORB is interest rate on reserve balances. ON RRP is overnight reverse
repurchase agreement.
Source: Figure 5 in Jane Ihrig and Scott Wolla (2022), "Let's Close the Gap: Updating the Textbook
Treatment of Monetary Policy," Journal of Economic Education, vol. 53 (3), pp. 232-49.


Summary of Fed's Toolbox
Policy Im