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

up or down ) as needed to match the estimated demand for reserves in order to keep the federal funds rate very close to the fomc ’ s target. 2 in this setup, the amount of banking reserves in the system – required and excess – was very small and the desk typically conducted open market operations that added or drained no more than a few billion dollars of reserves from the banking system to ensure that the federal funds rate traded around the fomc ’ s target. in october 2008, after passage of the tarp legislation, the federal reserve was authorized to implement a new tool, the ability to pay interest on required and excess reserves. 3 this tool was significant because it meant that the fomc would be able to control interest rate policy even with a much larger balance sheet and a much larger amount of excess reserves in the banking system. this was important because it gave us more scope to expand the federal reserve ’ s balance sheet to help address the financial crisis and to provide support for the economic recovery, knowing that later, when the recovery took hold, we could raise interest rates even with an enlarged balance sheet. the fed wouldn ’ t necessarily be forced to return to the much smaller balance sheet we had prior to 2008 before we could begin the monetary policy normalization process. when interest is paid on reserves, these reserves retain value even when they are no longer scarce. banks may be able to borrow funds at lower interest rates from financial entities such as money market funds that are not permitted to hold deposits at the federal reserve and place these borrowed funds with the federal reserve to earn the higher interest rate paid on reserve balances. how well the ability to pay interest on reserves works in practice in raising the entire constellation of short - term interest rates depends critically on the willingness of banks to engage in such arbitrage activity. prior to lift - off, we were uncertain how much friction there might be that would limit the willingness of banks to expand their balance sheets. these frictions include limits on bank leverage that can make the use of balance sheet capacity costly, competitive frictions given the relatively narrow range of banks that are viewed as sufficiently creditworthy to warrant being recipients of large uncollateralized loans and, for those banks that accept fdic insured deposits, insurance premiums that increase when they borrow reserves and their total liabilities increase. to help ensure that money market rates would track the federal funds rate regardless of these frictions, the fomc developed a second tool – the