The Ample Reserves Regime

Background

• Before 2008: Fed used a Limited Reserves Regime (LRR).

  • Tools: Open Market Operations, Discount Rate, Reserve Requirements.

  • Goal: Influence Federal Funds Rate (FFR) by changing money supply.

• After 2008 (Great Recession):

  • Fed cut FFR to near zero.

  • Began large-scale asset purchases (Quantitative Easing).

  • Bank reserves grew from $15 billion → $2.7 trillion (≈17,900% increase).

  • Reserves became “ample”, not limited.

  • 2020: Reserve requirements reduced to zero → full Ample Reserves system.

🧰 The Fed’s New Policy Framework

Goal

• The Fed targets the Federal Funds Rate (FFR) — the policy rate.

• Policy rate = key interest rate used to set and communicate monetary policy stance.

• Fed uses administered rates to steer the FFR into its FOMC target range.

💡 The Market for Reserves

• Banks hold reserves in accounts at the Fed.

• They lend/borrow reserves → transactions form the federal funds market.

• FFR = the price of borrowing reserves.

• The Fed controls this price using administered rates.

⚙ The Fed’s Toolbox (Ample Reserves Regime)

1. Interest on Reserve Balances (IORB)

• Primary tool.

• Interest the Fed pays banks on reserves held at the Fed.

• Steering mechanism:

  • ↑ IORB → ↑ FFR (contractionary)

  • ↓ IORB → ↓ FFR (expansionary)

2. Overnight Reverse Repurchase Agreement (ON RRP)

• Supplementary tool.

• Interest paid to non-bank institutions (money market funds, etc.) for lending overnight to the Fed.

• Sets a floor on the FFR.

3. Discount Window

• Lending directly to banks at the Discount Rate.

• Ceiling for FFR (above FOMC target range).

4. Open Market Operations (OMO)

• Buying/selling securities to maintain ample reserves.

• Purchases → ↑ reserves (rightward shift in supply curve).

📈 Policy Implementation Summary

📊 Ample Reserves Model (AP Macro)

• Supply of reserves = horizontal (ample).

• FFR determined by demand and administered rates.

• Fed steers FFR using IORB, ON RRP, and Discount Rate.

🧭 Monetary Policy Scenarios

1. Economy Weakens (Expansionary Policy)

• Low employment, inflation ↓.

• Fed lowers target range for FFR by decreasing administered rates (IORB, ON RRP, Discount Rate).

• Market rates ↓ → borrowing ↑ → spending/investment ↑ → GDP ↑ → unemployment ↓.

2. Inflation Rising (Contractionary Policy)

• Inflation > 2%, unemployment low.

• Fed raises target range for FFR by increasing administered rates.

• Market rates ↑ → borrowing ↓ → spending/investment ↓ → inflation ↓.

🧮 Practice Summary

If output < full employment:

• Use expansionary policy (lower IORB & discount rate).

• Interest rates ↓, Real GDP ↑, Unemployment ↓.

🧠 Key Takeaways

• Fed shifted to Ample Reserves after 2008 due to massive increase in reserves.

• FFR = policy rate targeted within a range by the FOMC.

• Administered rates (IORB, ON RRP, Discount Rate) are how the Fed steers FFR.

• Monetary policy implementation = adjusting IORB to move FFR into target range.