Last year, there was marked deterioration in conditions in the US Treasury and agency mortgage-backed securities (MBS) markets at the onset of the COVID-19 pandemic, and therefore the Federal Reserve’s asset purchases were undertaken to support market functioning.
Asset purchases are ongoing and continue to help foster smooth market functioning and accommodative financial conditions, supporting the flow of credit to households and businesses. This expansion in the Federal Reserve’s assets also has the effect of increasing Federal Reserve liabilities — particularly reserve balances — which can have important implications for money markets.
In a recent speech, Lorie Logan discussed the recent rapid expansion in reserves, and its influence on money market conditions. She is executive vice president in the Markets Group of the Federal Reserve Bank of New York; manager of the System Open Market Account (SOMA) for the Federal Open Market Committee (FOMC); and head of Market Operations, Monitoring, and Analysis (MOMA).
Logan said in a statement: “The adjustment to higher reserve levels has important implications for money markets. I have been pleased that the FOMC’s implementation framework continues to accommodate the adjustment to higher reserve levels resulting from the FOMC’s actions to foster smooth market functioning and accommodative financial conditions
“Given the significant increase in reserves and reduction in Treasury bill supply since the start of the year, overnight money market rates have softened. With reserves expected to grow further, we will be monitoring money markets closely and will continue to make adjustments as needed.
“In this environment, I am confident that the Federal Reserve’s tools will continue to support effective policy implementation. IOER sets a benchmark for bank lending and borrowing activity, and the ON RRP facility establishes a floor for overnight rates. Ultimately, it is these administered rates and the spread between them that will control overnight money market rates in the FOMC’s ample reserves regime and will influence the mix of Federal Reserve liabilities,” she said.