the balance sheet by reinvesting principal repayments. because the stock of reserves is so large, it is impractical to use open market operations to quickly reduce reserves back to the point where the federal funds rate can be controlled with scarcity, at least for now. 4 our current framework relies, instead, on providing the market with two overnight investment opportunities to help steer money market rates : interest on reserves ( ior ) and the overnight reverse repurchase agreement ( on rrp ) facility. 5 by law, ior is available only to depository institutions. 6 absent frictions, ior should provide a floor on interest rates, since competition between banks that can acquire funds in the wholesale market at rates below ior and earn the spread should bring these rates very close to that paid on reserves. in practice, a number of frictions have led money market rates to trade moderately below ior. on rrp, which is offered to a broad selection of counterparties that includes money market funds, is intended to intensify competition in money markets and enhance the transmission of ior into other overnight money market rates. it also has proved useful as a shock absorber. i will get back to that in a moment. the transmission of monetary policy relies on competition within, and integration across, money markets. the fomc ’ s policy target is the federal funds rate, which is a measure of what banks pay to take out unsecured overnight loans from other banks and from government - sponsored entities. however, the federal reserve does not transact in the federal funds market, and therefore cannot directly impact the federal funds rate. 7 instead, it relies on a predictable relationship between rates in the markets in which it does operate, and rates on federal funds borrowings. moreover, while the fomc ’ s goals for monetary policy are maximum employment and price stability, the economic decisions of households and firms generally don ’ t depend directly on the federal funds rate, since they don ’ t participate in that market. 8 instead, their decisions depend on broader financial conditions, including the interest rates on home mortgages and corporate bonds, the performance of the stock market, and the foreign exchange value of the dollar. 9 as a result, for monetary policy to achieve its objectives, markets must function well enough to transmit the stance of policy, both from the markets in which the federal reserve directly transacts to its policy target, and then onward from that target to other money markets,

bank financial intermediaries. the fact is the banking system is capital - constrained, with insufficient capital to expand its balance sheet fast enough to offset the shrinkage evident in the non - bank sector. although the federal reserve cannot create capital for banks, it can provide funding directly to the private sector, attenuating the consequences caused by a balance - sheet - constrained banking system. the cpff and the talf are both important in restoring the flow of credit to borrowers. the cpff essentially jump - started the commercial paper market, which had largely shut down following the failure of lehman brothers in september. the talf ’ s purpose is to restart the securitization markets, and thereby lower the cost of borrowing to households and business. the talf does this by providing term, non - recourse loans to investors against aaa - rated collateral. investor demand for these loans leads to downward pressure on aaa - rated financing rates, lowering the cost of credit. although talf is off to a relatively slow start – hurt, in part, by the reluctance of some investors to participate because of worries about the potential implications for them of the tarp funding that is involved in the talf program, it has helped to restart the securitization markets in the consumer asset - backed securities area and has brought down funding costs for consumer abs issuers. the third goal of these policy interventions has been to improve market function. by dramatically reducing rollover risk, the federal reserve ’ s willingness to serve as the lender or investor of last resort has helped improve market function in a broad number of areas. rollover risk is the risk that a borrower may not be able to obtain new funding in order to repay an investor when the investor needs the funds for other uses. if rollover risk is high, the investor is going to be concerned about getting its funds back and, thus, may be unwilling to make the investment in the first place. the impact of the fed ’ s intervention on rollover risk has been especially important in the triparty repo market and in the commercial paper market. the triparty repo market is a market in which investors such as money market mutual funds lend funds, mostly on an overnight basis, to securities dealers, with the loans collateralized by high - quality securities. during the crisis, this market became less stable. as the financial condition of some of the major securities dealers worsened, the clearing banks became more reluctant to return the cash that the trip