These adjustments have allowed us to learn how ON RRPs might be used to support the monetary policy objectives of the FOMC. Our testing has demonstrated that ON RRP operations can set a soft floor on short-term interest rates. That is, while some trades may occur below the ON RRP offering rate, the volume-weighted averages of most money market rates have been above the ON RRP rate on nearly all days (Figure 2). Data across a range of money markets provide evidence that changes in the ON RRP rate affected pricing for both unsecured and secured instruments and that the operations successfully set a floor on short-term interest rates. While market participants are aware of the success in producing a floor from such volume-weighted rates as the fed funds effective rate and GCF Repo Index®, the Desk has been also examining detailed transaction-level data for evidence that the ON RRP sets a floor on nearly all overnight money market transactions. 12  The payment of interest on reserves has been in place since October 2008, although the Federal Reserve Board recently requested public comment on proposed technical changes to the methodology for calculating IOER. The proposal intends to enhance the effectiveness of changes in the IOER rate in moving the federal funds rate into the target range when changes in those rates do not coincide with the beginning of a reserve maintenance period. Further information is available at http://www.federalreserve.gov/newsevents/press/ bcreg/20150413a.htm.
There is, therefore, a natural “glide path” for the ON RRP facility to be phased out over time as the SOMA securities portfolio runs off and the size of the balance sheet is reduced to the smallest size needed for effective and efficient monetary policy implementation. The pace at which the portfolio runs off will be influenced by a wide range of variables, including the FOMC’s decisions about its securities portfolio, the future path of interest rates (which will affect the prepayment speed of the Fed’s agency mortgage-backed securities portfolio), and currency growth. Under a set of baseline assumptions from the end of 2014, the level of reserves is projected to fall below $ trillion in early 2019 and to reach its steady state in late 2020 (Figure 1). 11 In the meantime, we can introduce features into the facility’s design that would limit its size even as it supports interest rate control. Examples include managing the spread between the IOER rate and the ON RRP rate to influence demand for the facility, setting a cap on the facility’s size through individual or aggregate limits, and establishing an auction mechanism to allocate usage. If needed, the Committee can adjust these levers to discourage usage and shrink the footprint of the facility. The Committee has already directed the Desk to include some of these features in its testing. Finally: The FOMC noted that it is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.