Simon M Potter: Money markets and monetary policy normalization
Remarks by Mr Simon M Potter, Executive Vice President of the Markets Group of the
Federal Reserve Bank of New York, at the Money Marketeers of New York University, New
York City, 15 April 2015.
* * *
I would like to thank Julia Gouny, Deborah Leonard, and Eric LeSueur for their excellent assistance in the
preparation of these remarks and colleagues in the Federal Reserve System for numerous insightful comments
and suggestions.
Accompanying charts can be found at the end of the speech.
It is a pleasure to speak again at the Money Marketeers. Much has happened with the
implementation of monetary policy in the sixteen months since I last addressed this
audience:
• Recognizing a substantial improvement in the outlook for the labor market, the
Federal Open Market Committee (FOMC) concluded its outcome-based asset
purchase program in October 2014, having completed a total of $1.6 trillion in
Treasury and agency MBS purchases over nearly two years.
• The Federal Reserve has continued to test operational tools that it can use to
control interest rates with a large balance sheet, through a continuation of the
overnight reverse repurchase agreement (ON RRP) exercise that began in
September 2013, as well as through term RRPs and the Term Deposit Facility.
• The FOMC revised and augmented its communications around the approach it
intends to implement when it becomes appropriate to begin normalizing the stance
of monetary policy.
• The FOMC's forward guidance on the future stance of policy has changed. In
March, the Committee reaffirmed its view that the current zero to 1⁄4 percent target
for the federal funds rate remains appropriate to support continued progress toward
maximum employment and price stability. Noting that economic conditions were
unlikely to warrant an increase in the target range at the April meeting, it advised
that such an increase could be warranted at any later meeting, depending on how
the economy evolves.
My comments today will focus on the Federal Reserve's readiness to implement policy
firming when directed to do so by the FOMC. In this context, I will discuss the Federal
Reserve's ongoing refinement of its approach to policy normalization, with a focus on initial
steps to leave the zero lower bound and some of the considerations that have directed the
Committee away from a fixed-rate, full-allotment ON RRP facility. I will then review results of
our testing, which inform our confidence in that approach. I will also discuss the Federal
Reserve's flexibility to adapt its operational and analytical tools to the dynamic nature of the
markets in which we operate.
As always, these views are mine alone and do not necessarily reflect those of the New York
Fed or the Federal Reserve System.
Ongoing refinements in the Federal Reserve's approach to policy normalization
With the conclusion of the FOMC's asset purchase program last October and the ongoing
reinvestment of principal repayments, the System Open Market Account's (SOMA) securities
portfolio stands at $4.25 trillion. This portfolio is associated with some $2.9 trillion in excess
reserve balance liabilities - a level at which the Open Markets Trading Desk (the Desk) will
be unable to move the effective federal funds rate up or down with small variations in the
supply of reserves, as it did before the financial crisis.1 Against this backdrop,
implementation of monetary policy will require a new operational approach to influence
shortterm interest rates when the FOMC determines it is time to start raising them.
The FOMC outlined its anticipated approach to policy normalization - that is, raising the
federal funds rate and other short-term interest rates to more normal levels, and reducing the
Federal Reserve's securities holdings - in a statement of Policy Normalization Principles and
Plans published after the September 2014 FOMC meeting, with additional details provided in
the March 2015 FOMC meeting minutes.2 In its September statement, the Committee noted
its plans to reduce monetary policy accommodation by raising its target range for the federal
funds rate. The Federal Reserve intends to move the federal funds rate into the target range
primarily by adjusting the interest rate it pays on excess reserve balances (IOER), and will
use an ON RRP facility and other supplementary tools, as needed, to help control the federal
funds rate. The Committee noted that an ON RRP facility will be used only to the extent
necessary and will be phased out once it is no longer needed to help control the federal
funds rate.
With respect to the Fed's balance sheet, the Committee intends to reduce securities holdings
in a gradual and predictable manner, primarily by ceasing to reinvest repayments of principal
on securities held in the SOMA.3 In the longer run, the Committee intends that the Federal
Reserve will hold no more securities than necessary to implement monetary policy efficiently
and effectively, and that it will hold primarily Treasury securities.
The March 2015 minutes augment the September Principles and Plans with additional details
about the FOMC's intended operational approach at the commencement of policy firming.
Specifically, the Federal Reserve intends to target a range for the federal funds rate that is
25 basis points wide, and to set the IOER rate and the offering rate associated with an
ON RRP facility equal to the top and bottom of the target range, respectively. It intends to
allow aggregate capacity of the ON RRP facility to be temporarily elevated to support policy
implementation. It can also adjust the IOER rate and parameters of the ON RRP facility, and
to use other tools such as term operations, as necessary for appropriate monetary control
based on policymakers' assessments of the efficacy and costs of their tools. The Committee
expects that it will be appropriate to reduce the capacity of the ON RRP facility fairly soon
after it commences policy firming.
I'd like to explore some of these elements in more detail.
1
This measure of reserves includes current balances of RRPs conducted under the Desk's operational exercise
and term deposits. In actuality, balances held in these categories shift the composition of the Federal
Reserve's liabilities away from reserves, although they don't reduce the total size of the balance sheet. Note
that the total quantity of reserves in the banking system is largely a byproduct of Federal Reserve activities
(such as asset purchases or lending programs) and the private sector's demand for other Federal Reserve
liabilities (such as currency). Individual bank lending transactions can redistribute reserves, but they do not
change the total quantity of them. See Todd Keister and James J. McAndrews, "Why Are Banks Holding So
Many Excess Reserves?" Federal Reserve Bank of New York Current Issues 15, no. 8, December 2009.
http://www.newyorkfed.org/research/current_issues/ci15-8.pdf.
2
The FOMC's September 2014 Normalization Principles and Plans and March 2015 meeting minutes are
available, respectively, at http://federalreserve.gov/newsevents/press/monetary/20140917c.htm and
http://federalreserve.gov/monetarypolicy/fomcminutes20150318.htm.
3
The Committee further specified that it expects to cease or commence phasing out reinvestments after it
begins increasing the target range for the federal funds rate; the timing will depend on how economic and
financial conditions and the economic outlook evolve. The Committee said that it does not currently anticipate
selling agency mortgage-backed securities (MBS) as part of the normalization process, but noted that limited
sales might be warranted in the longer run to reduce or eliminate residual holdings.
First: IOER. The Federal Reserve began paying interest on reserve balances in October
2008; interest rates on required and excess reserve balances have both been 1⁄4 percent
since mid-December 2008.4 The Federal Reserve intends to use adjustments to the IOER
rate - a rate it directly administers - as the main tool for moving the fed funds rate and other
short-term interest rates into its target range.
The IOER rate is essentially the rate of return earned by a bank on a riskless overnight
deposit held at the Fed, thus representing the opportunity cost to a bank of using its funds in
an alternative manner, such as making a loan or purchasing a security. In principle, no bank
would want to deploy its funds in a way that earned less than what can be earned from its
balances maintained at the Fed. Even though banks are the only institutions eligible to earn
IOER, arbitrage should lift market rates up to the level of the IOER rate. In practice, however,
with the large levels of excess reserves in the system, certain institutional aspects of money
markets - including bank-only access to IOER, credit limits imposed by cash lenders and
other impediments to market competition, and the costs of balance sheet expansion
associated with arbitrage activity - appear to create frictions that have made IOER act more
like a magnet that pulls up short-term interest rates than a firm floor beneath them.5
Second: An ON RRP facility. The FOMC will supplement the magnetic pull of changes in the
IOER rate with an ON RRP facility to help control the federal funds rate.6 Under the facility,
the Desk will offer general collateral reverse repurchase agreements at a specified offering
rate to a broad set of counterparties - including several types of nonbank financial
institutions that are significant lenders in U.S. money markets.
ON RRPs, particularly if offered at full-allotment - that is, fulfilled for any amount demanded
at the designated rate - are conceptually similar to IOER for banks in that they provide
access to a risk-free overnight investment.7 An ON RRP facility can therefore help firm the
floor beneath interest rates by widening the universe of counterparties that are unwilling to
lend at rates below those available directly from the Fed. A facility can also help to alleviate
some of the frictions that may curb the effectiveness of IOER in a system with large levels of
excess reserves by enhancing market competition through a strengthening of large cash
lenders' bargaining positions, and by reducing the amount of reserves held by banks and
therefore associated balance sheet costs.
Third: A 25 basis point target range for the federal funds rate bounded by the IOER and ON
RRP rates. Framing the stance of policy in terms of the federal funds rate focuses monetary
policy on a rate that is familiar to the public. Meanwhile, setting a target range, rather than a
4
Congress granted the Federal Reserve the authority to pay interest on reserve balances held by depository
institutions in 2006, with an effective date of October 2011. The implementation of this ruling was accelerated
to October 2008 during the financial crisis to enhance the Federal Reserve's ability to control short-term
interest rates amid the reserve-expanding credit programs and asset purchases it initiated at that time.
Although the rates of interest on required reserve balances and excess reserve balances are currently equal,
they need not be the same.
5
I spoke about these dynamics in December 2013 and October 2014 speeches, available at
http://www.newyorkfed.org/newsevents/speeches/2013/pot131202.html and
http://www.newyorkfed.org/newsevents/speeches/2014/pot141007.html.
6
When the Desk conducts a reverse repo transaction, it sells Treasury securities held in the SOMA under an
agreement to repurchase the securities at a pre-determined price. The difference between the sale price and
the repurchase price, together with the length of time between the two legs of the transaction, implies a rate of
interest (the reverse repo rate) paid by the Federal Reserve to its counterparty. The transaction leaves the
size of the SOMA's securities portfolio unchanged, but shifts some of the liabilities on the Fed's balance sheet
from bank reserves to reverse repos while the trade is outstanding
7
Unlike IOER, however, a full-allotment ON RRP facility would theoretically offer a perfectly elastic supply of a
safe asset at a fixed rate. In practice, the amount of ON RRPs that the Federal Reserve could supply would
likely be limited by the lesser of the level of excess reserves or the amount of securities available from the
SOMA portfolio for such transactions.
point target, is viewed as appropriate for providing some flexibility in interest rate control
when the quantity of reserves remains elevated. As for the Fed's tools for policy
implementation, setting the IOER and ON RRP rates at the upper and lower bounds of the
target range is a straightforward arrangement at the start of policy firming.8 A spread of this
size between the Federal Reserve's two administered-rate tools is expected to be narrow
enough to provide sufficient interest rate control but wide enough to preserve a reasonable
volume of trading in the federal funds market and to keep the Federal Reserve's footprint in
the nonbank financial sector from growing too large. As suggested by operational guidance
in the March minutes, policymakers may adjust either side of the spread between these two
rates, as needed, once normalization is under way.
Fourth: Qualifications around the use and settings of an ON RRP facility. The FOMC intends
to use an ON RRP facility only to the extent necessary and will phase it out when it is no
longer needed to help control the federal funds rate. But what is necessary, and how can the
facility be phased out?
As the minutes of recent FOMC meetings show, Committee participants differ in their
answers to those questions, but all agree that demonstrating sufficient control over money
market rates during the critical early stages of policy normalization is a priority. Against this
backdrop, the Committee has noted that it plans to allow the aggregate capacity of the facility
to be temporarily elevated to support policy implementation at liftoff, but also expects that it
will be appropriate to reduce ON RRP capacity fairly soon after policy firming commences.
While the $300 billion aggregate cap on ON RRP usage employed during exercise
operations to date has generally provided sufficient capacity to establish a floor on the level
of money market rates, it is difficult to know ex ante whether the same amount will be
adequate once we move away from the zero lower bound. Providing capacity that market
participants will judge sufficient to meet demand with a high degree of certainty can therefore
enhance the confidence of policymakers and market participants that the facility will support
short-term interest rates at the time of liftoff.
It is important to note that allowing for elevated capacity in an ON RRP facility is not the
same as offering a fixed-rate, full-allotment facility. Through testing, we've learned that the
fixed-rate and full-allotment features are not necessary for securing interest rate control.
Moreover, by supplying a perfectly elastic quantity of a risk-free asset at a fixed-rate, a
fixedrate, full-allotment ON RRP facility might have undesirable effects on financial stability and
the Federal Reserve's role in financial intermediation.9
In periods of financial stress, the availability of a fixed-rate, full-allotment facility could enable
a rapid or unexpected expansion that exacerbates disruptive flight-to-quality flows by
facilitating a run away from funding financial institutions and nonfinancial corporations. This
dynamic could undermine financial stability. Separately, an ON RRP facility might affect the
8
The spread between the IOER and ON RRP rates should not be confused with the FOMC's stance on
monetary policy, expressed through a target range for the federal funds rate. Nor should it be thought of as a
"corridor" operating framework for policy implementation. Within a corridor framework, relatively small changes
in the supply of reserves can have a significant effect on equilibrium short-term rates, and the penalties and
costs of holding too many reserves or too few reserves (set by rates on marginal deposit or lending facilities,
respectively), generally limit the range of rate movements in the market. In an environment in which the supply
of reserves far exceeds the demand, however, changes in the supply of reserves are not linked to movements
in market rates. Instead, with elevated levels of reserves, the Federal Reserve's operating framework more
closely resembles a "floor" framework, in which interest rate control is established by directly administering a
minimum rate (or here, a range of rates) in money markets.
9
A fuller discussion of the secondary effects of an ON RRP facility and options for addressing them can be
found in Joshua Frost, Lorie Logan, Antoine Martin, Patrick McCabe, Fabio Natalucci, and Julie Remache,
"Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations," Federal Reserve Bank
of New York Staff Reports, no. 712, February 2015. http://www.newyorkfed.org/research/staff_reports/
sr712.pdf.
Federal Reserve's role in financial intermediation - particularly if it were permanently in place
- by expanding the Federal Reserve's presence in short-term funding markets or potentially
altering the structure and functioning of money markets in unanticipated ways.10 These risks
are likely small given the sizable level of excess reserves currently in the system, which
establishes the Federal Reserve's large footprint in money markets. However, the risks
associated with offering a perfectly elastic supply of ON RRPs at a fixed rate could increase
as the level of excess reserves declines over the course of normalization and an ON RRP
facility becomes less important to support interest rate control.
These risks inform the Committee's desire to phase the facility out when it is no longer
needed to control the federal funds rate. Indeed, money market rates should become more
closely aligned with the IOER rate as the quantity of reserve balances in the system
approaches greater levels of scarcity, likely reducing the need for supplementary support
from an ON RRP facility. And since ON RRPs just swap one Federal Reserve liability for
another - reserves for reverse repos - demand for RRPs should recede as the asset side of
the Fed's balance sheet shrinks. There is, therefore, a natural "glide path" for the ON RRP
facility to be phased out over time as the SOMA securities portfolio runs off and the size of
the balance sheet is reduced to the smallest size needed for effective and efficient monetary
policy implementation.
The pace at which the portfolio runs off will be influenced by a wide range of variables,
including the FOMC's decisions about its securities portfolio, the future path of interest rates
(which will affect the prepayment speed of the Fed's agency mortgage-backed securities
portfolio), and currency growth. Under a set of baseline assumptions from the end of 2014,
the level of reserves is projected to fall below $1 trillion in early 2019 and to reach its steady
state in late 2020 (Figure 1).11
In the meantime, we can introduce features into the facility's design that would limit its size
even as it supports interest rate control. Examples include managing the spread between the
IOER rate and the ON RRP rate to influence demand for the facility, setting a cap on the
facility's size through individual or aggregate limits, and establishing an auction mechanism
to allocate usage. If needed, the Committee can adjust these levers to discourage usage and
shrink the footprint of the facility. The Committee has already directed the Desk to include
some of these features in its testing.
Finally: The FOMC noted that it is prepared to adjust the details of its approach to policy
normalization in light of economic and financial developments. Flexibility is a critical element
of the Federal Reserve's approach to policy normalization. Policymakers have said that they
will adjust the IOER rate and parameters of an ON RRP facility, and use other
supplementary tools as necessary - including term tools - during the normalization process.
In doing so, they will weigh the efficacy and costs of each of the tools in their arsenal to
ensure that they are optimizing policy objectives while maintaining appropriate interest rate
control.
I'll now explain our confidence in and readiness to implement this approach.
Preparedness to implement normalization
Extensive testing of ON RRPs and other supplementary tools have provided policymakers
with confidence that they will be able to maintain control over interest rates - that is, that
rates will move up with increases in the IOER rate - during the normalization process.12
An important determinant of the effectiveness of an ON RRP facility is whether a sufficiently
wide set of nonbank counterparties has access to it. The New York Fed currently executes
RRPs with 163 counterparties comprising many of the major cash lenders in secured and
unsecured money markets - including money market funds that manage about 70 percent of
the total U.S. money market fund assets under management and account for more than a
quarter of total tri-party repo lending against government collateral.13 This provides a high
degree of confidence that we are transacting with an adequate set of counterparties to
achieve our policy execution objectives.14
Throughout the testing regime, the Desk has varied the settings and design of the reverse
repo operations, with operational results informing subsequent changes. We've operated at
different times of the day, increased the maximum bid limit per counterparty, and introduced
an aggregate cap of $300 billion and a single-price auction mechanism to allocate awards
should the sum of submitted bids exceed the cap. We've also adjusted the offering rates and
tested ON RRPs in conjunction with term RRPs at quarter-ends. These adjustments have
allowed us to learn how ON RRPs might be used to support the monetary policy objectives of
the FOMC.
Our testing has demonstrated that ON RRP operations can set a soft floor on short-term
interest rates. That is, while some trades may occur below the ON RRP offering rate, the
volume-weighted averages of most money market rates have been above the ON RRP rate
on nearly all days (Figure 2).
Data across a range of money markets provide evidence that changes in the ON RRP rate
affected pricing for both unsecured and secured instruments and that the operations
successfully set a floor on short-term interest rates. While market participants are aware of
the success in producing a floor from such volume-weighted rates as the fed funds effective
rate and GCF Repo Index®, the Desk has been also examining detailed transaction-level
data for evidence that the ON RRP sets a floor on nearly all overnight money market
transactions.
12
The payment of interest on reserves has been in place since October 2008, although the Federal Reserve
Board recently requested public comment on proposed technical changes to the methodology for calculating
IOER. The proposal intends to enhance the effectiveness of changes in the IOER rate in moving the federal
funds rate into the target range when changes in those rates do not coincide with the beginning of a reserve
maintenance period. Further information is available at http://www.federalreserve.gov/newsevents/press/
bcreg/20150413a.htm.
13
With the addition of 25 expanded counterparties who were cleared to participate fully in RRP operations
starting on March 16, 2015, the Desk's 163 RRP counterparties comprise 141 expanded counterparties
(105 money market funds, 12 government sponsored enterprises, and 24 banks) plus 22 primary dealers. A
list of the Desk's reverse repo counterparties is available at http://www.newyorkfed.org/markets/
expanded_counterparties.html.
14
Consistent with the temporary nature of the ON RRP facility, the New York Fed does not expect to increase
the total number of RRP counterparties further, unless the addition of new counterparties is deemed
necessary to support the implementation of monetary policy. Thus, the number of expanded RRP
counterparties is not expected to exceed 150. Additional firms that meet the eligibility criteria are allowed to
submit applications, but will be added to the counterparty list only if the maximum number of expanded RRP
counterparties has not been reached. On March 9, 2015, the Desk released a policy statement indicating that
it could remove an entity from the RRP counterparty list for failing to meet prescribed eligibility and
participation criteria. The statement is available at http://www.newyorkfed.org/markets/opolicy/
operating_policy_150309.html.
A series of rate adjustments last November and December was particularly instructive in this
examination. During the six-week test, the offering rate was temporarily lowered from 5 basis
points to 3 basis points, then raised to 7 basis points and 10 basis points.15 The Fed's
FR 2420 data on bank borrowing activity show that after each increase in the ON RRP
offering rate, the distribution of fed funds trades shifted toward higher rates, with the vast
majority of trades being executed at rates at or above the offering rate (Figure 3). The same
patterns were observed in detailed data on brokered fed funds and Eurodollar trades, the
latter of which encompasses a larger volume and wider set of lenders than fed funds, and
also in secured markets. Examining in particular individual repo trades where money market
funds and GSEs supply cash to counterparties over the tri-party platform, we saw repo rates
shift higher and nearly all trading volume occur at or above the ON RRP rate. Thus, the rate
on the ON RRP facility performed as a floor for nearly all overnight money market
transactions, exactly as theory would predict for even small and temporary rate changes in
the offering rate.
After subsequently lowering the ON RRP offering rate back to its exercise baseline of 5 basis
points in mid-December, secured rates declined. Interestingly however, average unsecured
rates remained at somewhat elevated levels, even as a portion of the activity returned to
lower rate levels (Figures 4 and 5).16 The drivers of this dynamic remain unclear and illustrate
the complexity of money markets, but may partly reflect some lenders in unsecured markets
gaining information about their relative bargaining power as a result of the ON RRP tests.17
Overall, observations from testing and reports from market participants suggest that ON RRP
operations generally work the way we have expected, with market participants evaluating the
attractiveness of ON RRP investments relative to other opportunities available to them in the
market. Indeed, take-up in the operations generally increases as the spread between
alternative market rates and the ON RRP offering rate narrows, and aggregated usage
patterns differ across counterparty types.18
Take-up, particularly for prime money market funds, substantially increases around quarter-
and year-ends, when cash investors' access to other short-term investments can become
more limited. All else equal, the decline in the supply of short-term investment alternatives
can create volatility in market rates, so the Federal Reserve's ability to provide investment
capacity through ON RRPs at these times may be important for monetary control. Tellingly,
the only time the $300 billion aggregate cap on ON RRP operations was reached was in the
September 2014 quarter-end operation, soon after the cap's introduction surprised market
participants, leaving them searching for investment options when less than two weeks
remained before quarter-end. Money market rates softened over that period as lenders
sought to protect themselves against the risk of not having their bids fully filled in the Fed's
15
An October 29, 2014, policy statement announcing the details of the test plan is available at
http://www.newyorkfed.org/markets/opolicy/operating_policy_141029.html.
16
A similar dynamic is present in the brokered Eurodollar data.
17
Money market prices also appear to reflect some stickiness. Much money market activity is over the counter,
potentially leading to search frictions and bargaining. Anecdotal evidence suggests that lenders typically
interact directly with a small number of counterparties, perhaps because a portion of the activity is derived
from costly relationship lending. These factors may contribute to imperfect competition.
18
Money market funds account for a substantial majority of take-up, and their participation is particularly
responsive to rates on ON RRPs relative to those in the tri-party repo market. Government-sponsored
enterprises account for the next largest share of take-up, with participation sensitive not only to market rates
but also to non-price factors like their intra-month cash flow cycles. Not surprisingly, participation by banks and
primary dealers tends to be more limited, because banks have access to higher-yielding IOER and primary
dealers are typically net cash borrowers in the repo market. However, primary dealer take-up does increase
when repo rates, particularly in the inter-dealer market, fall below the ON RRP rate. Take-up data by
counterparty type, updated with a quarterly lag, are available under "Historical Data" at
http://www.newyorkfed.org/markets/omo/dmm/temp.cfm.
quarter-end operation. Indeed, requested bids in the September 30 operation exceeded the
cap by about $100 billion, some bids were only partially filled, and ON RRPs were awarded
at a stop-out rate of zero percent.
In December 2014 and March 2015, the early provision of additional investment capacity
through term RRP operations spanning the quarter-end dates, on top of the $300 billion of
capacity provided through ON RRPs, provided confidence to money market counterparties
that sufficient investment opportunities would be available.19 Absorbing some investment
demand in term operations ahead of those quarter ends likely kept demand for ON RRPs on
the quarter-end dates below the cap and helped to keep money market rates above the
ON RRP offering rate. Given an apparent high degree of substitutability between overnight
and term RRPs, cumulative take-up in these operations helps us to assess variability in
potential demand for safe investments around peak times and to evaluate how much
capacity the Federal Reserve might need to provide in an ON RRP facility to satisfy demand
sufficiently to maintain interest rate control (Figure 6).20
While our testing suggests that the current parameters of ON RRP operations have worked
successfully with IOER to control short-term interest rates, there are limits to what we can
learn from testing. Importantly, we will likely not know the level of support that proximity to
the zero lower bound has provided to money market rates until we start to move away from
it. Demand for ON RRPs following liftoff could remain relatively steady. But it could
conceivably be much greater than what we have seen at higher levels of interest rates or as
regulatory and structural changes in money markets boost demand for safe assets, which I
will discuss momentarily. Additionally, having some excess capacity, also known as
headroom, in ON RRP operations over expected usage is important for the facility's
effectiveness in helping to control rates. One might want such headroom - which provides
confidence to market participants that an ON RRP cap will not bind - to be somewhat higher
on average if take-up in ON RRP operations becomes more volatile. Given the importance of
a successful liftoff to the Federal Reserve's credibility, the FOMC has indicated an intention
to set ON RRP capacity at a temporarily elevated level when policy firming commences to
support policy implementation.
As always, the Federal Reserve will monitor financial markets closely and make adjustments
in its execution of monetary policy, as needed, to achieve its mandated objectives.
Changes in money markets
The operational approach for policy normalization I described earlier refocuses the
mechanism for implementing monetary policy back to money markets, after the post-crisis
period in which policy has been driven by large-scale asset purchases. However, we will be
operating in a complex, dynamic, and still-evolving market environment that looks much
different from the money markets in which the Fed last operated actively to achieve its
interest rate objectives. Still, these markets are no less important for the transmission of
monetary policy or the broader U.S. financial system than they were before.
In recent years, money market trading dynamics have changed, reflecting th