Over the last decade, the federal funds market has evolved to accommodate new policy tools such as interest on reserves and the overnight reverse repo facility. Trading motives have also responded to the expansion in aggregate reserves as the result of large-scale asset purchases. These changes have affected market participants differently since, for instance, not all institutions are required to keep reserves at the Fed and some are not eligible to earn interest on reserves. Differential effects have changed the profile of participants willing to borrow and lend in this market, and this shift provides an opportunity to study how unconventional policy actions shape participant incentives. In today’s post, we take a detailed look at regulatory filings to identify the main players in today’s fed funds market and understand how their roles have evolved.
The full post is available at http://libertystreeteconomics.newyorkfed.org/2016/07/how-have-high-reserves-and-new-policy-tools-reshaped-the-fed-funds-market.html#.V4TP8o71b-A