Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Boston
Current Policy Perspectives
The liquidity effect of the Federal Reserve’s balance sheet reduction on short-term interest rates
Falk Brauning
Abstract

I examine the impact of the Federal Reserve’s balance sheet reduction on short-term interest rates emanating from the declining supply of reserve balances. Using an exogenous shift in the supply of reserves, I estimate that by January 2019, when the Fed will have reduced its portfolio by $500 billion, the overnight repurchase agreement (repo) spread (relative to the lower bound of the federal funds target range) will be 10 basis points higher and the fed funds spread will be 2 basis points higher than in October 2017, all else being equal. I also find that a declining supply of reserve balances reduces recourse to the Fed’s overnight reverse repo (RRP) facility, which might initially dampen the tightening effects on short-term rates of the Fed’s balance sheet reduction.


Download Full text
Download Summary
Cite this item
Falk Brauning, The liquidity effect of the Federal Reserve’s balance sheet reduction on short-term interest rates, Federal Reserve Bank of Boston, Current Policy Perspectives 18-1, 01 Oct 2017.
More from this series
JEL Classification:
Subject headings:
Keywords: monetary policy; interest rates; liquidity effect; Federal Reserve balance sheet
For corrections, contact Catherine Spozio ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal