As a result, they expect that, as the FOMC increases the federal funds rate over time, other interest rates might not rise one-forone with it. As one consequence of this, they express a concern that the Federal Reserve might see greater use of its ON RRP operations over time as monetary policy is tightened, because the rates offered on these operations—presumably rising one-for-one with changes in the target federal funds rate range—will become increasingly attractive relative to other market rates, which they expect to rise more slowly. To date, at least, this does not appear to be happening. I think this paper makes an important point about transmission: monetary control does not stop at the effective federal funds rate, and our framework must ensure that the stance of monetary policy is passed through into other money market rates. However, I am less persuaded that the data supports Darrell and Arvind’s concern about the present efficacy of the framework. First, I think the recent pickup in dispersion we see in money markets might not tell us much about what will happen going forward. A lot of what has happened in money markets in recent years may relate to one-off factors associated with money market fund reform and with liftoff from the zero lower bound.
BIS central bankers’ speeches  7  Capital requirements and leverage constraints both affect the overall size of banks’ balance sheets. But credit booms and busts are often associated with excessive lending to particular risky segments of the market. So instruments to affect the composition of balance sheets are also potentially useful, for instance through selective variation in the risk weights applied to the calculation of capital ratios. Quantitative controls applying to particular sorts of loans, such as maximum loan-to-value ratios on mortgages are another option, as are minimum haircuts on repo and similar financial transactions between intermediaries. Finally, since excessive maturity mismatch is an aggravating feature of financial crises, banks could be asked to increase their holdings of reliably liquid assets as the risk of instability builds, in an analogous fashion to the capital buffer. Macroprudential policies are sometimes described as the missing instrument, but in reality many of these tools are familiar to regulators and there is already international experience in their application, often from emerging economies (though in some cases their application has been aimed at restraining aggregate demand rather than reducing the risk of financial instability). Indeed, the Australian experience nearly a decade ago is a prime example. Over 2002 and 2003, house prices here rose nearly 40 per cent, stimulated in part by changes in the tax treatment of housing, increased competition in credit markets and the attainment of a low inflation macroeconomic environment; alongside this, there was a similarly rapid rate of expansion in mortgage lending (see Chart 3).