to - day basis. it also eliminates the need for a lot of interbank trading activity to move reserves to banks that would otherwise find themselves short of reserves on a particular day. in my view, this type of intermediation activity does not have much social value. while the fomc has discussed these issues, it has made no decision about its choice of longterm monetary policy operating framework. this seems appropriate to me because over the next few years we will gain considerable further experience about operating with a floor - type system. nevertheless, my expectation is that the fomc will ultimately favor maintaining a floortype system similar to what is in place today. as support, i would point to the minutes of the november 2016 fomc meeting, in which participants observed that the current framework had been working well. this leads us to the next question : assuming that a floor system is retained, what amount of reserves will be needed in the banking system so that day - to - day open market operations are not necessary to keep the federal funds rate within its target range? in other words, how small can the amount of excess reserves be before banks begin to compete and bid for such reserves, introducing unwanted volatility to the federal funds rate? first, there will need to be sufficient excess reserves to accommodate day - to - day fluctuations in the “ autonomous factors ” that influence the amount of reserves in the banking system. these include shifts in the treasury ’ s cash balance, the foreign repo pool, and overnight reverse repo facility usage. second, there will have to be an additional buffer to meet banks ’ underlying demand for reserves. we expect that the demand for reserves will be considerably higher than it was prior to the financial crisis because reserves can be used to satisfy the more stringent liquidity requirements that are in place today, and because the opportunity cost of holding reserves is much lower now since the fed pays interest on reserves. together, as a rough starting point, we have suggested that the necessary amount of excess reserves could be in a range of $ 400 billion to $ 1 trillion. 6 coupled with uncertainty about the likely growth in other factors, such as currency outstanding, this implies a normalized balance sheet size of, perhaps, $ 2. 4 trillion to $ 3. 5 trillion in the early 2020s. 5 / 6 bis central bankers'speeches after reaching that level, one should anticipate that the fed would resume purchases of treasury securities. these purchases would allow the

york fed ’ s portfolio projections report and accompanying data files illustrate some projected paths for the size of the fed ’ s securities portfolio under alternative scenarios for the long - run level of liabilities. for midyear 2017 update and report archive, see www. newyorkfed. org / markets / annual _ reports. html. 7 see, for example, eric m. engen, thomas laubach, and david reifschneider ( 2015 ), the macroeconomic effects of the federal reserve ’ s unconventional monetary policies, finance and economics discussion series 2015 – 005 ( washington : board of governors of the federal reserve system, february ) ; brian bonis, jane ihrig, and min wei ( 2017 ), the effect of the federal reserve ’ s securities holdings on longer - term interest rates, feds notes ( washington : board of governors of the federal reserve system, april 20 ) ; and troy davig and a. lee smith ( 2017 ), forecasting the stance of monetary policy under balance sheet adjustments, macro bulletin ( kansas city, mo. : federal reserve bank of kansas city, may 10 ). 8 see david harrison ( 2017 ), “ economists see modest impact from a fed balance - sheet reduction, ” wall street journal, may 11. for the new york fed ’ s markets group surveys, see the july results at www. newyorkfed. org / markets / primarydealer _ survey _ questions. html and www. newyorkfed. org / markets / survey _ market _ participants. html. 6 / 6 bis central bankers'speeches