Fed blog post tests theory on Fed Funds rate and short-term Treasury supply

Explaining the Puzzling Behavior of Short-Term Money Market Rates
Antoine Martin, James J. McAndrews, Ali Palida, and David Skeie

Since 2008, the Federal Reserve has dramatically increased the supply of bank reserves, effectively adopting a floor system for monetary policy implementation. Since then, the behavior of short-term money market rates has been at times puzzling. In particular, short-term rates have been surprisingly firm in recent months, despite the large increase in reserves by the Fed as a part of its response to the coronavirus pandemic. In this post, we provide evidence that both the supply of reserves and the supply of short-term Treasury securities are important factors for explaining short-term rates.

The post is available at https://libertystreeteconomics.newyorkfed.org/2020/08/explaining-the-puzzling-behavior-of-short-term-money-market-rates.html

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