The Federal Reserve's Balance Sheet and Overnight Interest Rates

42 Pages Posted: 1 Jan 2013

See all articles by Jaime Marquez

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section

Ari Morse

Carnegie Mellon University - David A. Tepper School of Business

Bernd Schlusche

Board of Governors of the Federal Reserve System

Date Written: September 10, 2012

Abstract

This paper provides a comprehensive study of the interplay between the Federal Reserve's balance sheet and overnight interest rates. We model both the supply of and the demand for excess reserves, treating assets of the Federal Reserve as policy tools, and estimate the effects of conventional and unconventional monetary policy on overnight funding rates. We find that, in the current environment with quite elevated levels of reserves, the effect of further monetary policy accommodation on overnight interest rates is limited. Further, assuming a path for removing monetary policy accommodation that is consistent with the FOMC's exit principles, we project that the federal funds rate increases to 70 basis points, settling in a corridor bracketed by the discount rate and the interest rate on excess reserves, as excess reserves of depository institutions decline to near zero.

Keywords: Reserve Balances, Federal Funds Rate, Balance Sheet, Large-Scale Asset Purchases, Interest Rate on Excess Reserves, Exit Strategy

JEL Classification: E43, E47, E52, E65, G01, G17

Suggested Citation

Marquez, Jaime and Morse, Ari and Schlusche, Bernd, The Federal Reserve's Balance Sheet and Overnight Interest Rates (September 10, 2012). Available at SSRN: https://ssrn.com/abstract=2195151 or http://dx.doi.org/10.2139/ssrn.2195151

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Ari Morse

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213
United States

Bernd Schlusche (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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