And with less vulnerable money market funds, other cash-rich entities could emerge as a source of inexpensive funding for the shadow banking system. Finally, as I have noted, the systemic risks associated with short-term wholesale funding in prudentially regulated institutions have not fully been countered by the important capital and liquidity standards adopted since the crisis.
Payment of interest on these balances is our principal tool for keeping the federal funds rate in the FOMC’s target range. This tool has made it possible for us to gradually return interest rates to a more normal level without disrupting financial markets and the economy.