United States
United States[USD]
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 Federal Reserve implements monetary policy in a regime in which an ample supply of reserves ensure that control over the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required. 1 The FOMC's primary means of adjusting the stance of monetary policy is changing the 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. The Federal Reserve sets administered rates - the interest rate paid on reserve balances (IORB) 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. The IORB 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 IORB rate, competition for these funds to earn an arbitrage profit would suggest that banks will bid up these rates to a level close to the IORB.
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. The Federal Reserve also maintains two standing repurchase agreement (repo) facilities – a domestic standing repo facility and a repo facility for foreign and international monetary authorities. These facilities also serve as backstops in money markets to support the effective implementation of monetary policy smooth market functioning.
Unconventional monetary policy measures
The Committee's primary means of adjusting the stance of monetary policy is through changes in the target range for the federal funds rate. The Committee judges that the level of the federal funds rate consistent with maximum employment and price stability over the longer run has declined relative to its historical average. Therefore, the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past. Owing in part to the proximity of interest rates to the effective lower bound, the Committee judges that downward risks to employment and inflation have in-creased. The Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals.
1
This approach to policy implementation was outlined in the January 2019 Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization.
Institutional setup of monetary policy decisions and operations
| Policy decision body, size and composition | Federal Open Market Committee |
|---|---|
| Major mandates 1 | 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 |
| maturity (days) | 1 |
| Standing facilities | Lending (discount window, FIMA repo facility, Standing repo facililty), deposit (ON RRP facility and Foreign repo pool) |
| Corridor width (bp) | 25 bp 2 |
| Reserve requirements | No 3 |
| maintenance period | N/A |
| Main operation 4 | (i) RS(ON RRP facility) (ii) Outright purchases and temporary transactions in Treasury and Agency securities |
| functions | Interest rate control as well as to help foster smooth market functioning and to influence financial conditions |
| maturity (days) | Interest rate control as well as to help foster smooth market functioning and to influence financial conditions |
| regular interval | Interest rate control as well as to help foster smooth market functioning and to influence financial conditions |
| frequency | Interest rate control as well as to help foster smooth market functioning and to influence financial conditions |
| 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 purchases is set by the FOMC to achieve policy objectives, while reinvestment operations are fixed by the amount of maturities or principal paydowns. 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 5 | Summary of Economic Projections (SEP) incorporating projections from FOMC meeting participants produced on quarterly basis; full summary released along with FOMC statement. |
| Publication of projected path of policy rate 6 | FOMC participants’ projections of appropriate policy paths (anonymised) released as part of SEP |
Reserve requirements: ratios and size
| Main functions served | N/A 7 |
|---|---|
| Domestic currency | 0% 8 |
| Foreign currency | – |
| Average | 0% |
| Required reserves | USD 0 |
| Required reserve as % of GDP | 0% |
| Actual reserves | USD 3.8 tr 9 |
| Actual reserve as % of GDP | 16.93% 10 |
Main features of reserve requirements
| Averaging | N/A |
|---|---|
| Carry-over | N/A |
| Type | N/A |
| Maintenance period | N/A |
| end (day) | N/A |
| Calculation period | N/A |
| end (day) | |
| Lag before maintenance | N/A |
| Vault cash | |
| restrictions | |
| Remuneration | N/A |
| average rate | N/A |
| marginal rate | N/A |
| Framework last changed | 03/20 11 |
Liquidity position and forecasting
| Structural Position | Surplus |
|---|---|
| Most volatile factor(s) | Treasury General Account (Government Deposits), ON RRP, Foreign RP Pool, Other Deposits (GSEs, designated financial market utilities) |
| Most unpredictable factor(s) | Treasury General Account (Government Deposits), ON RRP, Foreign RP Pool, Other Deposits (GSEs, designated financial market utilities) |
| Forecast horizon(s) | (i) 6 months (ii) through 2030 |
| Frequency | (i) Daily (ii) Monthly |
| Frequency of revision | (i) Daily (ii) Every FOMC round |
| Forecast published? | No 12 |
Standing facilities: lending / market ceiling
| Name | (i) Primary credit facility (PCF) (ii) Secondary credit facility (SCF) (iii) Standing repo facility (SRF) (iv) FIMA repo facility |
|---|---|
| Form | Secured loan |
| Pricing method | (i) Currently set at 25 bps (ii) Top of policy rate target range + 100 bps currently set at 75 bps (iii) currently set at 25 basis points (iv) currently set at 25 bps |
| Maturity | (i) O/N (up to 90 days) (ii) O/N [10] (iii) O/N (iv) O/N 13 |
| Access limited by/to | PCF for depository institutions in sound financial condition, SCF for other depository institutions; loans must be fully collateralised. [11] SRF eligibility includes primary dealers and depository institutions; eligible securities for repo transactions are U.S. Treasury securities, agency debt securities, and agency mortgage-backed securities. FIMA repo facility for foreign central bank and international accounts; eligible securities for repo transactions are U.S. Treasury securities. 14 |
| Function(s) | Marginal liquidity accommodation (i, ii, iii, iv); lender of last resort (i, ii); ceiling on policy rate (i, iii) |
Standing facilities: deposit / market floor
| Name | Standing facility 15 |
|---|---|
| Form | Deposit |
| Pricing method | |
| Maturity | O/N |
| Access limited by/to | Depository institutions |
| Function(s) | Help manage interest rates |
Open market operations: repo or reverse repo
| Name/Type 16 | (i) SRF Facility (ii) ON RRP facility (iii) other RP, RRP operations |
|---|---|
| Maturity | (i) O/N (ii) O/N (iii) Up to 65 business days |
| Frequency | (i) Daily (ii) Daily (iii) Discretionary |
| Pricing method | (i) Fixed-quantity multi-price auction (ii) Fixed-price or fixed-quantity[9] (iii) RP: Fixed-quantity multi-price auction; term RRP: Single-price or fixed- quantity 17 |
| Access limited by/to | (i) Primary dealers plus SRF counterparties (includes depository institutions) (ii) Primary dealers plus expanded RRP counterparties (including some US government-sponsored enterprises, money market mutual funds, and depository institutions) (iii) RP: Primary dealers; RRP: Same as ON RRP facility |
| Function(s) | (i) Supports interest rate control and smooth market functioning, provides liquidity (reserves) (ii) Supports interest rate control as administered rate, absorbs liquidity (reserves) (iii) RP: Can be used for similar purposes as the SRF; RRP: Can be used for similar purposes as the RRP |
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 | Up to 88 days 18 |
|---|---|
| Frequency | Discretionary--by approval of request by the drawing central bank. |
| Pricing method | Based on OIS plus a fixed spread |
| Access limited by/to | Certain central banks that have implemented bilateral agreements with the Federal Reserve for such swaps 19 |
| Function(s) | (i) To provide US dollars to certain foreign central banks for the purpose of providing dollar liquidity to their local counterparties (ii) For the Federal Reserve to obtain foreign currencies from certain foreign central banks for the purpose of offering foreign currency liquidity to US institutions (iii) Separately from (i) and (ii), a reciprocal currency arrangement with two other North American central banks for the purpose of providing liquidity in their currencies directly to these participating central banks 20 |
Other significant liquidity management means
| Name/Type 21 | OT - outright purchases and sales of open market operations eligible securities 22 |
|---|---|
| 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; smooth market functioning |
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 23 |
Collateral
| Standing facilities: List of eligible collateral | Discount Window: The Federal Reserve Banks will consider accepting as discount window collateral any assets that meet regulatory standards for sound asset quality. This includes most investment grade-rated fixed-income securities denominated in U.S. dollars, selected AAA-rated fixed income securities denominated in an Eligible Foreign Currency, and performing bank loans. For additonal information, see The Federal Reserve System's Collateral Guidelines at frbdiscountwindow.org. Standing Repurchase Agreement Facility (SRF): Eligible collateral includes Treasury securities, agency debt securities, and agency mortgage backed securities. For additonal information, see the Repo Securities Schedule on the Federal Reserve Bank of New York website. Foreign and International Monetary Authorities (FIMA) Repo Facility: Eligible collateral includes U.S. Treasury securities. For additional information, see the Federal Reserve Board's Policy Tools website. 24 |
|---|---|
| Standing facilities: Discretion of central bank on collateral 25 | Discount Window: Individual Reserve Banks (RBs) have common standards for collateral eligibility and must ensure they are 'secured to the satisfaction of the Federal Reserve bank'. Collateral eligibility exceptions may be made at the discretion of a RB. SRF: FRB-NY has discretion within the confines of OMO-eligible collateral (Treasury, agency or agency MBS securities, only), including adjusting haircuts. FIMA Repo Facility: The Federal Reserve has the right to approve or deny requests by foreign central banks to use the facility. |
| Open market operations: List of eligible collateral | ON RRP: Eligible collateral is currently limited to US Treasury securities per FOMC direction. For additonal information, see the Repo Securities Schedule on the Federal Reserve Bank of New York website. |
| Open market operations: Discretion of central bank on collateral 26 | FRB-NY has discretion within the confines of OMO-eligible collateral (Treasury, agency or agency MBS securities, only), including adjusting haircuts. |
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: date and time of operations, settlement date, term of trade, auction method and pricing, security type(s) - Post-operation: amount submitted and accepted, stop-out rate per security type, weighted average rate/award rate per security type, high/low rate per security type - Quarterly: RRP aggregate take-up by counterparty type - Dodd Frank Act: transaction details on OMO trades, including counterparty information, 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 - Post-operation: amount bought/sold per security, total amount of bids/offers received and accepted - Monthly: individual transaction information, including trade date, securities purchased/sold, trade price, settlement date, operation type - Dodd Frank Act: transaction details on OMO trades, including counterparty information, made public quarterly with a two-year lag Commercial MBS purchases: - Prior to operation: date and time of operations, security details and maximum amount to be purchased, settlement date - Post-operation: amount bought/sold per security, total amount of bids/offers received and accepted - Monthly: individual transaction information, including trade date, securities purchased/sold, trade price, settlement date, operation type - Dodd Frank Act: transaction details on OMO trades, including counterparty information, 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, maturity range of specific securities to be purchased, 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 - Post-operation: amount purchased per security, total amount of offers received and accepted - Monthly: trade price information for specific securities purchased in the prior month, including weighted-average accepted price, least favorable accepted price, % partial allocation at least favorable accepted price - Dodd Frank Act: transaction details on OMO trades, including counterparty information, made public quarterly with a two-year lag Treasury Rollovers: - CUSIP-level SOMA holdings are published every Wednesday on FRBNY website and Treasury Department reports amount of SOMA tenders and awards in auction results Central bank liquidity swaps ("FX swaps"): - Post-operation: transactions reported weekly - Quarterly: FX report with amounts outstanding by central bank counterparty on quarter-end OLD TEXT: 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. Commercial MBS purchases: - Prior to operation: operations schedule, operation parameters, settlement dates announced - Post-operation: results - Monthly: Prices paid - Dodd Frank Act: transaction details on trades quarterly with a two-year lag, including counterparty information 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). Central bank liquidity swaps ("FX swaps"): - Post operation: transactions and positions reported weekly - Quarterly: FX report with aggregate FX swap positions |
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) 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) (viii) Aggregate data for lending facilities in response to COVID 19 pandemic 27 |
|---|---|
| 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 (viii) Board of Governors website |
| 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 (viii) Monthly |
1 Describe as well the legal status of the mandate and involvement of government
2 There are 15 bps between the current setting of interest on required and excess reserves and the primary credit rate of the discount window. Currently, interest on required and excess reserves is set at 10 bps; primary credit is set at top of policy rate target range at 25 bps, secondary credit rate is the top of policy rate target range plus 50 bps.
ON RRP offering rate set at the bottom of the target range at 0 bp.
3 The Federal Reserve reduced reserve requirement ratios to 0 percent, effective March 26, 2020.
4 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).
5 For instance, economic and inflation forecasts related to policy decision.
6 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.
7 The Federal Reserve reduced reserve requirement ratios to 0 percent, effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
8 The Federal Reserve reduced reserve requirement ratios to 0 percent, effective March 26, 2020.
9 Reserves are measured as banks' deposits at the Federal Reserve. Data are as of June 2021.
10 Reserves as of June 2021 as a percent of 2021 Q2 Nominal GDP
11 Reserve requirement ratios are set to zero. Calculation and maintenance of reserve requirements are no longer applicable.
12 The Treasury Department publishes its assumed end-of-quarter cash balance in its quarterly marketable borrowing estimates.
13 (i) In 2020 the Federal Reserve announced that depository institutions may borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis.
14 Depository institutions include: commercial banks, thrifts, credit unions, and US branches and agencies of foreign banks.
15 This table refers to the interest that depository institutions receive on their reserve balances held at the Federal Reserve. The Federal Reserve also has an ON RRP facility as a supplementary tool, which is available to a different set of counterparties to also support the floor (see Table 8a).
16 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).
17 ON RRP operations are conducted at a fixed offering rate if total propositions are less than the aggregate limit and are conducted as a single-price auction if propositions exceed the aggregate limit.
18 Typically conduct 7-day and 84-day transactions
19 In 2020, the FRS entered into temporary U.S. dollar swap arrangements with nine foreign central banks to offer them U.S. dollar liquidity amid strains in global dollar funding markets.
20 The Federal Reserve has had standing reciprocal liquidity swap arrangements with five central banks beginning 2013.
Separately, the FRS currently has a reciprocal currency arrangement established under the North American Framework Arrangement with two central banks.
21 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.
22 In response to COVID 19 pandemic a number of lending facilities (OT and DL) were established in 2020 under Section 13(3) of the Federal Reserve Act, and in partnership with the U.S. Treasury: the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, the Primary Dealer Credit Facility, the Paycheck Protection Program Liquidity Facility, the Primary and Secondary Market Corporate Credit Facilities, the Municipal Liquidity Facility, the Main Street Lending Facility, and the Term-Asset-Backed Secutirities Loan Facility.
All of these programs have been closed to new lending, although liquidity provision will remain outstanding for some facilities until the loans or purchased assets mature.
For more information on all lending facilities, including terms and conditions, visit the Federal Reserve website.
Also in response to the COVID 19 pandemic, efforts to facilitate liquidity in the global USD market include the introduction of the FIMA repo facility.
23 Other settlement systems include securities settlement systems, large value payment systems and retail payment systems.
24 The SRF and FIMA repo facility are also open market operations.
25 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.
26 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.
27 FX interventions: Treasury and Federal Reserve contributions accounted for separately. Intervention sizes could potentially be estimated from the Treasury’s weekly release of the US International Reserve Position, and the Federal Reserve’s weekly balance sheet statement.