Separately, an ON RRP facility might affect the  8  The spread between the IOER and ON RRP rates should not be confused with the FOMC’s stance on monetary policy, expressed through a target range for the federal funds rate. Nor should it be thought of as a “corridor” operating framework for policy implementation. Within a corridor framework, relatively small changes in the supply of reserves can have a significant effect on equilibrium short-term rates, and the penalties and costs of holding too many reserves or too few reserves (set by rates on marginal deposit or lending facilities, respectively), generally limit the range of rate movements in the market. In an environment in which the supply of reserves far exceeds the demand, however, changes in the supply of reserves are not linked to movements in market rates. Instead, with elevated levels of reserves, the Federal Reserve’s operating framework more closely resembles a “floor” framework, in which interest rate control is established by directly administering a minimum rate (or here, a range of rates) in money markets. 9  A fuller discussion of the secondary effects of an ON RRP facility and options for addressing them can be found in Joshua Frost, Lorie Logan, Antoine Martin, Patrick McCabe, Fabio Natalucci, and Julie Remache, “Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations,” Federal Reserve Bank of New York Staff Reports, no. 712, February 2015. http://www.newyorkfed.org/research/staff_reports/ sr712.pdf.
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.