Subsequently, growth in non-reserve liabilities such as currency and reductions in the Fed’s securities holdings caused reserve levels to decline. As the level of reserves has come down, we stepped up our monitoring of the effect of reserve levels on interest rates. The level of reserves consistent with “ample” is inherently highly uncertain, so we have been actively looking for signs that reserves might be growing scarce. Along with in-depth analysis of conditions in money markets, we conduct surveys of banks and other outreach to market participants to understand the factors that influence the demand for reserves.4 To smooth the transition to a level of reserves consistent with the framework, the FOMC announced a slowing of the pace of the reduction in securities holdings at its March meeting this year and stopped it outright at the July meeting.5 Based on a variety of metrics and information, the supply of reserves appeared ample during the summer and into early September. The funds rate traded well within the target range and money markets functioned well. Recent Developments in Money Markets With the stage set, I’ll turn to market conditions over the past month and the Fed’s actions. Conditions in money markets became highly volatile about a month ago. Secured and unsecured rates moved higher and became more disparate on Monday, September 16, and this intensified the following day. We had expected a number of factors—including corporate tax payments and the settlement of newly issued Treasury securities —to put some upward pressure on short-term rates.

The digitalisation of payment transactions, for instance, has helped to make cashless payments cheaper and simpler for customers – even if efficiency could still be further improved, especially where cross-border payments are concerned. The advent of dematerialised securities years ago is another example of innovation within the financial industry; this change greatly increased the efficiency of securities settlement and safekeeping. The digital transformation has also added value in another way: it has enabled bank customers to execute transactions with greater temporal flexibility and geographical independence. These days, traditional bank counters have morphed into apps that live on our smartphones. Such useful innovations have the potential to improve aggregate economic welfare. The challenge for regulators and central banks is to make sure they fully understand the effects – and side-effects – of these new mechanisms at an early stage. The same goes for innovations affecting financial market infrastructures – especially those that are systemically important. Such assessments of new technologies are based on a set of internationally accepted guidelines called ‘Principles for financial market infrastructures’. 2 These principles define the criteria that infrastructures must meet, thereby setting standards for innovation in this field. Central banks and regulators have a duty to pass legislation guaranteeing the safety of financial market infrastructures – by protecting their stability, resilience and availability, irrespective of technological change; but they must also take on board the efficiency goals of infrastructure providers and their participants. Regulatory adjustments may be needed to catalyse the positive effects of certain innovations.