What does Lorie Logan say on liqudity turmoil ? Summary

2019 January, the FOMC announced its intention to continue implementing monetary policy using an ample reserves operating regime. This means that the supply of reserves is sufficient to ensure that control over the federal funds rate and other short-term interest rates is exercised primarily through the Federal Reserve’s administered rates, and active management of the supply of reserves is not required. 

This last clause is an important feature of the framework and means that, over time, the level of reserves will be large enough to absorb short-term changes in factors affecting the supply of reserves without the need for frequent, sizeable interventions to offset these changes.

Liquidity Turmoil

In mid-September, upward pressure emerged in funding markets as corporate tax payments and the settlement of Treasury securities increased demand for securities financing and sharply reduced reserves in the system.

In addition, the level of reserves needed to maintain an ample reserves regime is more than the sum of individual banks’ reserves demand, particularly when there are frictions that result in inefficient redistribution of reserves.

Why Treasury bills?

Treasury bills are short-dated instruments, purchases of these securities can help maintain the supply of reserves while limiting the impact on financial conditions.

How do we approach the design of our purchases?

• First, reserve management purchases will replace over time the reserves that repo operations are currently supplying. In October, overnight and term repo operations together resulted in a daily average of around $190 billion in total repos outstanding 

In the near term, these operations have boosted the supply of reserves and helped to mitigate the risk of money market pressures adversely affecting monetary policy implementation.

Reserve management purchases will support expected gradual increases in demand for the Federal Reserve’s non-reserve liabilities, like currency in circulation, the Treasury General Account, the foreign repo pool, and other deposits. All else equal, growth of non-reserve liabilities will reduce reserves over time. Therefore, to maintain steady reserve levels, the Desk will offset the reserve-draining effects of growth in these liabilities through securities purchases—the same way Treasury purchases supported trend balance sheet growth before the crisis.

Reserve management purchases will provide reserves to absorb normal variability or unexpected changes in the Federal Reserve’s non-reserve liabilities so reserves don’t fall below the level needed to operate the ample reserves framework. Balances in the Treasury’s General Account (TGA), in particular, fluctuate greatly from day to day. We saw that in September, when tax payment and Treasury settlement-related flows into the TGA reduced reserves by over $115 billion in the course of two days.