NY Fed on Fed Funds Volatility
The New York Fed's Liberty Street Economics blog features, "How the Fed Smoothed Quarter-End Volatility in the Fed Funds Market." It reads, "Before the financial crisis, the Federal Reserve implemented monetary policy by targeting the overnight fed funds rate and then adjusting the supply of bank reserves every day to keep the rate close to the target. Before the crisis, reserves were generally in scarce supply, which periodically caused temporary spikes in the fed funds rate during times of high demand, typically at the end of each quarter. In this post, we show that the Fed actively responded to quarter-end volatility by injecting reserves into the banking system around these dates." It adds, "Large fluctuations in the fed funds rate around quarter-end were a feature in the fed funds market in the 1980s and 1990s and remain so today.... This heightened volatility hampered the Fed's ability to keep the fed funds rate on target during quarter-ends. The heightened volatility typically caused the fed funds effective rate to deviate from target." The blog adds, "The ... range of excess reserves was relatively narrow, `between $3 billion and $6 billion on most quarter-end dates. This narrow range suggests that the Fed chose not to eliminate reserve demand shocks completely." It concludes, "The Fed's response to the financial crisis of 2007-09 resulted in large amounts of excess reserves in the banking system. As a consequence, the Fed could no longer significantly influence the fed funds market on quarter-ends by modestly changing the level of reserves. Unlike in the pre-crisis period, the effective fed funds rate has tended to fall on recent quarter-end dates, as money market investors have faced reduced investment opportunities during the quarter-end and have shifted money into reverse repurchase agreements with the Fed instead. While some of the Fed's tools and operating procedures have changed since the crisis, a quarter-end pattern remains evident in the Desk's operations." In other news, the New York Fed also updated its "Reverse Repo Counterparties List." It says, "RBC Prime Money Market Fund is no longer a reverse repo counterparty, effective March 25." RBC is liquidating the fund in September 2016.
