At high levels of reserves, the responsiveness of rates to changes in reserve levels is fairly low, and the demand curve is said to be “flat.” As excess reserve levels decline, the responsiveness of rates increases. At low levels of excess reserves, the overnight rate responds sharply to small adjustments in the level of reserves, and the demand curve is considered “steep.” 20 Despite some of the recent upward moves in overnight rates, I don’t believe we’ve reached the “steep” portion of the demand curve, where aggregate reserves are scarce. Let’s run through some places where evidence of aggregate reserve scarcity might be found. To begin with, if we were closing in on the “steep” part, I might expect to see substantial above-IOR lending in the unsecured overnight markets, as at least some banks each day found themselves short of reserves and had to borrow them from other banks. In fact, the current amount of such 18  Assuming that all banks place an equal value on the next dollar of reserves, aggregate reserve scarcity is when that value is above the rate at which reserves are remunerated, and aggregate excess reserves is when that value is at or below the remuneration rate. 19 The classic paper on this topic is Poole (1968). A number of recent efforts have been undertaken to modernize the Poole model by adding interest on reserves and other features of modern money markets. Two notable examples of this are Schulhofer-Wohl and Clouse (2018) and Afonso, Armenter, Lester (2018).
The monetary policy implementation framework continues to provide the FOMC with excellent control over overnight money market rates, and has proven to be flexible, including through the technical adjustment, in the face of new developments. Thank you for your attention. I look forward to the panel discussion. ###  29  The Federal Reserve is working on enhancements to the overnight bank funding rate (OBFR) to capture wholesale borrowing activity, which moved from offshore to onshore branches. Collection of these data began on October 1, 2018. There will be a review of the new data and an evaluation of how its inclusion will impact the OBFR before its expected addition. 30 For more information about this survey, see Senior Financial Officer Survey, August 29, 2018. 13