relationship between rates in a range of money markets. thus, the desk was able to target a rate in one part of the unsecured market by conducting small secured operations as needed with primary dealers. since the financial crisis, the environment has changed in two important ways. first, by the end of 2014, following the large - scale asset purchase programs, the federal reserve balance sheet was funded by about $ 3. 1 trillion in liabilities other than federal reserve notes, which were mostly in the form of reserves in excess of the amount banks were required to hold ; in contrast, there were only $ 64 billion of non - federal reserve note liabilities in june 2007, of which only about $ 2 billion were excess reserves. as a result, reserves are now anything but scarce. second, congress granted the federal reserve an important new tool : the authority to pay interest on reserve balances, or ior. 11 in many countries, and in theory, a standing facility that pays ior provides a floor on interest rates. the reason is simple : if a private counterparty can invest cash at the central bank, then given the safety and convenience of this investment, it will dominate any other overnight investment at that interest rate. further, if banks can acquire funds in the wholesale market at rates below ior, then competition for these funds will bid up these rates close to that paid on reserves. the federal reserve instituted interest on reserves in late 2008, and the interest rate on reserves turned out not to be a floor ; market interest rates fell significantly below it. with the large levels of excess reserves in the system, certain institutional aspects of money markets in the united states – including bank - only access to ior, credit limits imposed by lenders and other impediments to market competition, and the costs of balance sheet expansion – appear to create frictions that have made ior act more like a magnet that pulls up short - term interest rates than a firm floor beneath them. thus, in considering how to implement policy normalization, the federal reserve evaluated a variety of ways to increase competition for funds among borrowers and thereby improve the control provided by ior. 12 the federal reserve initially considered an approach to policy normalization that was based on a combination of term operations and asset sales or redemptions aimed at making reserves sufficiently scarce so that, once the fomc decided to tighten monetary policy, this tightening could be implemented using ior within a framework that was otherwise similar to that used before

on asset purchases – the asset side of the bank ’ s balance sheet. this is a sharp contrast from the qe policy, where the main focus was on the size of in addition to the asset purchase program, the bank regularly purchases jgbs ( with the remaining maturity of up to 30 years, including that of one year or less ) at the rate of 21. 6 trillion yen per year to counterbalance the increased amount of banknotes in circulation. bis central bankers ’ speeches the current account balance at the bank – the liability side of the bank ’ s balance sheet. it is important to note that the volume of the current account balance is less emphasized here than in the qe policy. instead, with the cme policy it is important to examine whether there is room for further monetary easing by encouraging a further decline in longer - term interest rates and risk premiums. thus, the size of excess reserves is no longer a target and is endogenously determined as a result of market operations. third, the positive interest rate of 0. 1 percent applied to the complementary deposit facility ( introduced in october 2008 ) remains under the cme policy, while the policy target was set in the range of around 0 – 0. 1 percent. this differs from the qe policy, where no such a facility was present under the zero short - term interest rate environment. the bank pays an interest rate of 0. 1 percent on banks ’ excess reserves with the bank for several reasons. first, as pointed out earlier with respect to the assessment of the qe policy, shrinkage of the interbank markets may generate a situation in which financial institutions are unable to raise funds promptly from the markets when most needed. as a related issue, since this interest rate forms the floor for interbank market interest rates, the bank is able to smoothly provide sufficient liquidity to the market without causing large fluctuations in the interbank market rates. moreover, as a future issue, it has also been pointed out by svensson ( 2012 ) 15 that maintaining such a deposit facility interest rate makes it easier for a central bank to conduct an exit strategy smoothly by containing excessive inflation risks within the phase of economic recovery. if such a rate already exists, a central bank may be able to raise the deposit facility interest rate, thereby leading to higher interbank market interest rates even if there are ample excess reserves. however, positive aspects related to removing the interest rate have been pointed out. for example, a positive impact on the yen