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What Quantity of Reserves Is Sufficient?

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Abstract

A concern of the Federal Reserve is how to manage its balance sheet and whether, over the long run, the balance sheet should be small or large. In this post, we highlight results from a recent paper in which we show how, even during a period of “ample” reserves, the Fed’s management of its balance sheet had material impacts on funding markets and especially the repo market. We argue that the Fed’s “balance-sheet normalization” from March 2017 to September 2019—under which aggregate reserves declined by more than $950 billion—combined with post-crisis liquidity regulations, stressed the intraday management of reserves of large bank holding companies that are active in wholesale funding markets resulting in higher repo rates and spikes in such.

Suggested Citation

  • Adam Copeland & Darrell Duffie & Yilin Yang, 2021. "What Quantity of Reserves Is Sufficient?," Liberty Street Economics 20210929, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:93089
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    File URL: https://libertystreeteconomics.newyorkfed.org/2021/09/what-quantity-of-reserves-is-sufficient/
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    More about this item

    Keywords

    repo rates; reserves; Treasuries; Treasurys; payments; central bank balance sheets;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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