Roberto Perli, Manager of the Federal Reserve’s System Open Market Account (SOMA), spoke at the annual meeting of the National Association of Business Economics on Tuesday, October 10. He discussed monetary policy implementation, the performance of the Federal Reserve’s implementation framework over recent stress episodes, and his perspective on money markets and reserve conditions going forward.
“Recently, our implementation framework has confronted a number of stress tests and performed quite well.”
“The current point of transition between abundant and ample reserves is uncertain. Consequently, early warning signals will be important.”
“While reserves currently are clearly abundant, the [Open Market Trading] Desk will continue to carefully monitor market conditions.”
Perli reviewed the Federal Reserve’s “ample reserves” framework for implementing monetary policy. He explained how the interest rate on reserve balances (IORB) and the offering rate on the overnight reverse repo facility (ON RRP) work together to keep the effective federal funds rate (EFFR)—the key policy rate for the Federal Open Market Committee (FOMC)—within the Fed’s target range. “[I]t is clear that both the IORB and the ON RRP rate play important and complementary roles in maintaining rate control,” he said.
The EFFR has remained well within the target range since the start of the pandemic and through subsequent events. Perli discussed market developments earlier this year, noting that “our monetary policy implementation framework operates as intended even at times of stress.”
The SOMA Manager then discussed the reduction of the Federal Reserve’s balance sheet and monitoring of reserve conditions. “At some yet unknown point in the future, reserves will approach a level beyond which the FOMC would prefer to not allow further declines,” he said. He highlighted the information sources the Desk can use to assess reserve conditions.
Perli concluded: “The combination of a resilient and flexible operating framework and the constant vigilance of the extraordinarily talented and dedicated professionals on the Desk gives me confidence that balance sheet normalization can be accomplished without significant disruptions to short-term funding markets.”
Eric LeSueur is a policy and market analysis advisor in the Markets Group at the New York Fed.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.