United States

United States[$]

Institutional framework

The Federal Reserve Act establishes that the Board of Governors and the FOMC should conduct monetary policy "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." This statutory mandate ties monetary policy to the broader goal of fostering a productive and stable US economy.

The Federal Reserve's framework for monetary policy implementation features a short-term interest rate target as its key policy measure to communicate the FOMC's policy stance and an operating regime with ample reserves to implement this policy stance. The Federal Reserve uses a set of administered rates set by the Board of Governors and the FOMC, as well as market operations directed by the FOMC and conducted by the Open Market Trading Desk at the Federal Reserve Bank of New York to achieve its monetary policy objective. These tools help promote money market rate conditions consistent with the policy rate target. The FOMC can also alter the size and composition of its balance sheet and provide forward guidance about the path of the policy rate as additional policy measures to achieve its objectives.

Key features of the monetary policy implementation framework

The tools used by the Federal Reserve for policy implementation enable the central bank to maintain short-term interest rate control in an environment of ample reserve balances in the banking system. 1 The FOMC's key policy rate is a target range for the federal funds rate. The federal funds rate is the rate at which depository institutions and other eligible entities conduct overnight unsecured transactions in central bank balances. The width of the target range for the federal funds rate is 25 basis points. 2 The Federal Reserve sets administered rates - the interest rates paid on required and excess reserves that a bank holds at the Federal Reserve, supplemented by ON RRPs offered at a specified rate to a wide range of active nonbank lenders in addition to banks - as a means to move the federal funds rate into the target range and to maintain it in that range without actively adjusting the supply of reserve balances. 3 The interest on excess reserves (IOER) rate is the primary tool used to influence overnight interest rates. If a bank can earn interest on the reserve balances it holds at the central bank, then given the safety and convenience of this investment, little incentive exists for the bank to lend to private sector counterparties at a rate lower than that offered by the central bank. Further, if the bank can acquire funds in the wholesale market at rates below the rate paid on reserves, competition for these funds to earn an arbitrage profit would suggest that banks will bid up these rates to a level close to the interest rate on reserves.

Both IOER and the ON RRP offering rates have been helpful to guide the levels of the federal funds and other money market rates. In particular, several years back when market repo rates were soft, the ON RRP offering rate provided a soft floor to repo rates, which in turn helped maintain federal funds rates in the target range. More recently, when market repo rates moved above the FOMC's target range and put upward pressure on federal funds rates, the Federal Reserve made a few technical adjustments to lower the IOER rate, which lowered the federal funds rate within the target range.

The Federal Reserve also maintains the discount window, which is a secured lending facility designed to provide liquidity to commercial banks and other depository institutions. This facility acts as a ceiling for short-term interest rates: if the cost of obtaining reserve balances in the market becomes relatively expensive, then banks borrow funds from the discount window to manage reserve balances. In this way, the rate on discount window loans helps put a ceiling on the private market rate for reserve balances.

Unconventional monetary policy measures

In response to the financial crisis, the FOMC took a series of unconventional monetary policy measures. In particular, the FOMC conducted large-scale asset purchase programs (LSAPs) in the Treasury, agency debt, and agency MBS markets, which were designed to ease financial conditions and support the US housing market, and led to a significantly larger central bank balance sheet.

In October 2017, the FOMC initiated a program to gradually reduce the size of the Federal Reserve's securities holdings from elevated levels. At its July 2019 meeting, the FOMC noted that it would conclude the reduction of its aggregate securities holdings in the System Open Market Account in August 2019. However, the FOMC has affirmed - most recently following the January 2019 FOMC meeting - that the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.

1

At the conclusion of the January 2019 FOMC meeting, the Federal Reserve stated that it intends to continue to implement monetary policy in a regime with an ample supply of reserves and in which control over the level of the federal funds rate is exercised primarily through the setting of the Federal Reserve's administered rates.

2

This approach to policy implementation was outlined in the FOMC's September 2014 statement of Policy Normalisation Principles and Plans, which sets forth the Committee's strategy for normalising the stance of monetary policy. The Committee provided additional details about its intended operational approach in its March 2015 meeting minutes.

3

The Federal Reserve also sets the interest rate paid on required reserves (IORR), which has been the same as the IOER rate.

Institutional setup of monetary policy decisions and operations

Policy decision body, size and composition Federal Open Market Committee
Major mandates Statutory mandate from the Congress (outlined in the Federal Reserve Act) to promote maximum employment, stable prices, and moderate long-term interest rates. Many commonly refer to the “dual mandate” of maximum employment and price stability.
Decision-making process Vote of FOMC members
Frequency / length of meetings 8 regularly scheduled meetings per year (and other meetings as needed)
Frequency of announcements Same
Main policy target Fed funds rate target range; administered rates

Overview of key features

Key policy rate Federal Funds Rate
maturity (days) 1
Operating target (i) Target range for federal funds rate
(ii) Policy objectives for securities holdings
maturity (days) 1
Standing facilities Lending (discount window), deposit (interest on reserves and ON RRP facility)
Corridor width (bp) Primary credit to interest on reserves 55, Primary credit to ON RRP rate 75
Reserve requirements Yes
maintenance period 2 weeks
Main operation (i) RS (ON RRP facility)
functions Reduces reserves, supports interest rate control as administered rate
maturity (days) Reduces reserves, supports interest rate control as administered rate
regular interval Reduces reserves, supports interest rate control as administered rate
frequency Reduces reserves, supports interest rate control as administered rate
Overall frequency Daily
Discretion left to operational desk The Desk is directed to undertake OMOs “as necessary” to maintain the FOMC’s federal funds target range, but most OMOs are executed under more specific direction. In particular, the FOMC sets policy-sensitive parameters of RRP operations (such as the offering rate and size limits); the Desk has some discretion over certain operational aspects of RRPs. The aggregate size and asset class composition of securities reinvestment operations are fixed by the amount of maturities or principal paydowns and redemption caps that are set by the FOMC, but the Desk has some discretion over the size, timing, and execution of certain types of individual operations.
Key policy signals via
announcement
keynote tender
standing facility
other

Monetary policy communication

Explicit use of forward guidance Explicit forward guidance has been used at times as a monetary policy measure
Timing / media of policy announcement Via Federal Reserve website following conclusion of each FOMC policy meeting
Policy announcement and documents FOMC statement includes target rate decision and any other policy measures; implementation note outlines decisions about operational settings of tools to achieve the policy stance (eg the interest rate paid on required and excess reserves, the ON RRP rate, the operating objective for securities holdings, and the primary credit rate).
Explaining policy decisions Press conferences held following every FOMC policy meeting; ad hoc speeches
Dissemination of minutes (timing / media) FOMC meeting minutes released via website 3 weeks after date of policy decision
Content of minutes Minutes record decisions taken and reasoning behind decisions; and summarise policy discussions related to possible future policy actions.
Publication of forecasts Summary of Economic Projections (SEP) incorporating projections from FOMC meeting participants produced on quarterly basis; advance table released along with post-FOMC meeting press conference; full summary included as addendum to FOMC minutes.
Publication of projected path of policy rate FOMC participants’ projections of appropriate policy paths (anonymised) released as part of SEP

Reserve requirements: ratios and size

Main functions served Predictability of reserve demand
Domestic currency 0–10%
Foreign currency
Average 0–10%
Required reserves USD 189.6 bn
Required reserve as % of GDP 0.91%
Actual reserves USD 1,896 bn
Actual reserve as % of GDP 9.07%

Main features of reserve requirements

Averaging Y
Carry-over N
Type Lagged
Maintenance period 2 weeks
end (day) Wed
Calculation period 2 weeks
end (day) Mon
Lag before maintenance 17 days
Vault cash Y
restrictions
Remuneration Y
average rate 220 bps
marginal rate 220 bps
Framework last changed 10/08

Liquidity position and forecasting

Structural Position Excess
Most volatile factor(s) Treasury General Account (Government Deposits), ON RRP, Currency, Foreign RP Pool, Other Deposits (GSEs, designated financial market utilities)
Most unpredictable factor(s) Treasury General Account (Government Deposits), ON RRP, Currency, Foreign RP Pool, Other Deposits (GSEs, designated financial market utilities)
Forecast horizon(s) Approximately 1 year
Frequency Daily
Frequency of revision Daily
Forecast published? No

Standing facilities: lending / market ceiling

Name (i) Primary credit facility (PCF)
(ii) Secondary credit facility (SCF)
Form Secured loan
Pricing method (i) Top of policy rate target range + 50 bps
(ii) Top of policy rate target range + 100 bps
Maturity (i) O/N
(ii) O/N
Access limited by/to PCF for depository institutions in sound financial condition, SCF for other depository institutions; loans must be fully collateralised.
Function(s) Marginal liquidity accommodation; lender of last resort; ceiling on policy rate

Standing facilities: deposit / market floor

Name Standing facility
Form Deposit
Pricing method Top of policy rate target range less 5 bps for required reserves and excess reserves
Maturity O/N
Access limited by/to Depository institutions
Function(s) Help manage interest rates

Open market operations: repo or reverse repo

Name/Type (i) RP, RRP
(ii) ON RRP facility
Maturity (i) Up to 65 business days
(ii) O/N
Frequency (i) Discretionary
(ii) Daily
Pricing method RP: Fixed-quantity multi-price auction; RRP: Fixed-price or fixed-quantity
Access limited by/to RP: primary dealers; RRP: primary dealers plus expanded RRP counterparties (including some US government-sponsored enterprises, money market mutual funds, and depository institutions)
Function(s) (i) Liquidity injection and withdrawal
(ii) Reduces reserves, supports interest rate control as administered rate

Open market operations: central bank bills

Name N/A
Total issuance N/A
Maturity N/A
Restrictions on possible maturities N/A
Pricing method N/A
Access limited by/to N/A
Discretion left to operational desk N/A

Open market operations: FX swaps

Maturity N/A
Frequency N/A
Pricing method N/A
Access limited by/to N/A
Function(s) N/A

Other significant liquidity management means

Name/Type OT (purchase and sales)
Form
Frequency As appropriate, as directed by the FOMC (OTs) or Board of Governors (TDF)
Maturity Securities with up to 30Y maturity
Pricing Method Multi-price auction
Access limited by/to Primary dealers
Function(s) Portfolio management; influence longer-term interest rates

Settlement systems and intra-day liquidity facilities

Settlement system RTGS, since 1970
Intra-day liquidity facility Daylight overdraft caps. Fee if uncollateralised.
Charge No charge if against collateral; Fee if uncollateralised
Foreign currency settlement system No
CLS participation by banks Yes
Other settlement system(s) Yes

Collateral

Standing facilities: List of eligible collateral Discount Window: Most sound financial assets that depository institutions can hold. Includes most investment grade US dollar denominated fixed income securities, selected AAA rated foreign denominated fixed income securities, and performing bank loans; see: frbdiscountwindow.org
Standing facilities: Discretion of central bank on collateral Discount Window: Individual Reserve Banks (RBs) have discretion as long as they are ‘secured to their satisfaction’; RBs have common standards for collateral eligibility
Open market operations: List of eligible collateral US Treasury securities, Agency securities and Agency MBS
Open market operations: Discretion of central bank on collateral ON RRP collateral is limited to Treasury securities (per FOMC direction). For other RPs or RRPs, FRB-NY has discretion within the confines of OMO-eligible collateral (Treasury, agency or agency MBS securities, only).

Dissemination of operational information: liquidity forecast

Forecast published? No
Channel(s)
Timing
Remarks

Dissemination of operational information: open market operations

Volume and price published? Yes
Channel(s) Trade system, central bank website, wire services
Timing The following information is available on the FRBNY website:
Repo/RRPs:
- Prior to operation: schedule of repo / reverse repos, start and close time, settlement date, term of trade, auction method, collateral type
- Post-operation: amount submitted/accepted, stop-out rate per collateral type, weighted average rate per collateral type, high/low rate per collateral type
- Quarterly: Aggregate take-up by counterparty type
- Dodd Frank Act: transaction details on OMO trades made public quarterly with a two-year lag.
MBS purchases:
- Prior to operation: date and time of operations, specific securities and maximum amount to be purchased/sold, settlement date
- Post-operation: Amount bought/sold per security and total amount of bids/offers received and accepted
- Monthly: Individual transaction information, including trade date, securities purchased/sold, trade price, settlement date, and operation type
- Dodd Frank Act: transaction details on OMO trades made public quarterly with a two-year lag.
Treasury reinvestment purchases:
- Prior to operation: (1) a monthly tentative schedule of operations, including date and time of operations, settlement dates, security type and maturity range of specific securities to be purchased, and maximum total amount to be purchased, and (2) a pre-operation announcement that includes all of the above as well as the specific securities to be purchased in the operation.
- Post-operation: Amount purchased per specific security and the total amount of offers received and accepted in the operation.
- Monthly: Trade price information are made public for specific securities purchased in each operation in the prior month (ie weighted-average accepted price, least favorable accepted price, and % partial allocation at least favorable accepted price)
- Dodd Frank Act: transaction details on OMO trades made public quarterly with a two-year lag.
Treasury Rollovers:
- Treasury Department reports amount of SOMA holdings maturing ahead of auction and amount of SOMA tenders and awards in auction results (no info published on FRBNY website).

Dissemination of operational information: standing facilities

Lending facility usage: Channel(s) FRB website
Lending facility usage: Timing Weekly (every Thursday afternoon as of COB Wednesday) – aggregate volume, FR System and by FR district
Quarterly (with a two-year lag) – individual loan details (borrower name, facility, rate, loan amount, amounts of collateral by type)
Deposit facility usage: Channel(s) FRB website
Deposit facility usage: Timing Weekly – every Thursday afternoon as of COB Wednesday

Other information dissemination

Type (i) Effective federal funds rate (EFFR)
(ii) Overnight bank funding rate (OBFR)
(iii) Treasury Repo Reference Rates (SOFR, BGCR, TGCR)
(iv) Balance sheet data
(v) Reserves data
(vi) Treasury account balances
(vii) FX intervention (see footnote)
Channel(s) (i) FRBNY website
(ii) FRBNY website
(iii) FRBNY website
(iv) Board of Governors website
(v) Board of Governors website
(vi) Daily Treasury Statement
(vii) Treasury website, press release, FRBNY’s FX Quarterly Report
Timing (i) Daily
(ii) Daily
(iii) Daily
(iv) Weekly
(v) Weekly
(vi) Daily
(vii) Press release possibly the day of or day after. Quarterly Report released approximately 1.5 months following quarter-end