. as a result, their availability should have little effect on market rates. if, however, on rrps are offered above the level of money market rates that would be produced by ioer alone given prevailing frictions, on rrps should become attractive and help to form a floor for money market rates, either directly through increased take - up that reduces reserves or indirectly through the competitive pressure i described. since money funds – the majority of the fed ’ s on rrp counterparties – don ’ t face the same balance sheets costs as banks, the floor formed by on rrps should be relatively firm. while on rrps are a potentially useful tool for monetary policy control with large amounts of excess reserves, fomc and market participants have noted the potential for very large regular usage to alter patterns of financial intermediation. further, a fixed - rate structure with no usage limits could exacerbate liquidity pressures during times of stress. 11 the fomc recently authorized testing of a cap on the total daily usage of the on rrps that could help mitigate these risks. i ’ ll return to these risks and some ways that they may be mitigated in a bit. in sum, arbitrage activities by banks, complemented as needed by on rrp operations, should cause a higher ioer rate to lead to higher levels of market rates. however, if the pressure on market rates from the fed ’ s administered rates turns out to be insufficient, the committee has a range of other tools – including term deposits, term rrps, and asset sales – that could be used to help tighten the stance of policy. given the array of tools at our disposal, i am confident that the fomc can adjust and control short - term interest rates as needed to foster its objectives of maximum employment and price stability. the configuration of rates during normalization the committee ’ s normalization principles and plans do not detail the manner in which ioer as a primary tool would be combined with supplementary tools such as on rrps to move the fed funds rate into the target range. however, as reflected in the minutes to the july fomc meeting, most committee participants anticipate that, at least initially, the ioer rate could be set at the top of the target range for the funds rate, and the on rrp rate could be set at the bottom of that range. this is also consistent with the views of many market participants as reflected in surveys conducted by the desk

, an overall size limit of $ 300 billion per operation was imposed, and an auction process was introduced to determine the interest indeed, even prior to 2008, the range of fed funds trading on a given day could be quite wide, and the effective rate deviated significantly at times from the target rate for a day or two. this did not have any apparent effect on financial conditions or the economy. bis central bankers ’ speeches rate on the operation and allocate take - up when the sum of bids exceeds the new $ 300 billion limit. 14 the $ 30 billion individual bid limit was informed by evidence on the desired investments of counterparties that had bid at the previous maximum of $ 10 billion, and it took into account the size of assets under management of our counterparties. for almost all counterparties, the $ 30 billion limit is unlikely to be binding in any circumstances. the $ 300 billion overall limit was above total demand observed over the first year of testing, with the exception of the operation conducted at the end of the second quarter of this year. so what are the benefits of moving from a structure with individual caps alone to one with an aggregate cap as well? one benefit is that, in limiting the overall take - up but not individual take - up, an aggregate cap should produce a more efficient allocation of usage among counterparties than would a system of individual caps. further, an aggregate cap should better balance efficient control of money market rates under normal conditions with the risk of a destabilizing surge in use of the facility in times of stress. the reduced risk of a surge in use in a system with an aggregate cap comes from the fact that take - up across counterparties is not perfectly correlated. as a result, an aggregate cap that binds at some frequency can be set below the sum of individual caps that would bind for at least one of the counterparties at the same frequency. the aggregate cap also raises the individual bargaining power of counterparties relative to a system of lower individual caps, since in normal times counterparties can be relatively certain that larger bids at the on rrp facility will be filled. however, the possibility that the aggregate cap could bind even in only limited circumstances may undermine this effect on bargaining power. the federal reserve has been closely analyzing the results of the on rrp operations conducted under these new testing parameters in order to further its understanding of how an on rrp facility should be structured during the normalization process. as many market participants anticipated the aggregate cap did bind