As prepared for delivery
Let me start by personally welcoming you to the New York Fed. We have enjoyed a long and productive relationship with Columbia's School of International and Public Affairs, or SIPA, and it's great to be here to discuss timely and important issues.
The topic of my talk today is the optimal supply of central bank reserves. Prior to the global financial crisis, this issue was more or less settled. Then, in response to that crisis and the ensuing economic downturn-and again following the COVID-19 pandemic-many central banks expanded their balance sheets through various quantitative easing programs funded for the most part by large-scale increases in central bank reserves. These increases resulted in fundamental changes in ways central banks have approached the provision of reserves while maintaining control of short-term interest rates set by the monetary policymaking body. As a result of these experiences in managing large balance sheets, many central banks have reviewed, and in some cases modified, their strategies for supplying reserves and controlling interest rates. Although their approaches have differed in specifics, they share common elements that reflect the fundamental factors that shape the supply and demand for reserves.
Central banks have multiple goals in supplying reserves to the banking system that frequently involve trade-offs. First and foremost, they target a level of the policy interest rate and aim to minimize the variability of the policy rate around that target. In addition, they have goals related to supporting the functioning of financial markets and financial stability. For example, central banks may see advantages or disadvantages to interbank lending in money markets, as well as costs and benefits related to central bank lending into markets.
In this talk, I will consider this question using a relatively simple analytical framework for the supply and demand of reserves that can be applied to various jurisdictions with differences in institutional arrangements and policy objectives. I see this exercise as being in the spirit of William Poole's seminal analysis of the optimal instrument for monetary policy. My goal is to provide a useful background for the rich discussion ahead of us at this conference and elsewhere.