20 For a further discussion of the shape of the demand curve for reserves and its implications for policy implementation, see Logan, “Operational Perspectives on Monetary Policy Implementation: Panel Remarks on The Future of the Central Bank Balance Sheet,” May 4, 2018. 8  above-IOR lending remains low as a share of the overnight bank funding market, as shown in Figure 9. 21 I might also expect to see shifts in bank payments behavior—for example, more daylight overdrafts or more effort by banks to “optimize” their payment flows—but I have not seen this either. Most fundamentally, I might have observed a day-to-day relationship between shifts in the stock of reserves and overnight interest rates. Figure 10 shows a scatterplot of daily changes in reserve balances against daily changes in the spread between the IOR rate and the effective federal funds rate; there is no visible relationship. 21  On Oct 24, 2018, there was an increase in the share of federal funds transactions trading above the IOR rate, reflecting an increase in bank borrowing from Federal Home Loan Banks (FHLBs) to manage LCRs, rather than interbank lending. 9  Recent experience supports my belief that we are not at the “steep” portion of the demand curve and aggregate reserve scarcity. On one day in mid-September, there was a large drop in reserves—of nearly $ billion—as the Treasury increased its cash holdings at the Federal Reserve as a result of third-quarter tax receipts, as shown by the red point in Figure 10.
As a result, reserve balances fell to one of their lowest levels in a number of years apart from quarterends and were close to some private-sector estimates of where reserve scarcity might appear. Based on a wide range of indicators, and as suggested by the chart, there was no evidence of reserve scarcity on an aggregate basis; indeed, based on the metric shown, rates were little changed on this day. It seems highly likely that we are still on the “flat” part of the curve, where rates move little in response to shifts in reserves. However, it is still possible that the decline in reserves might be putting some upward pressure on rates. Even in the “flat” part, the slope of the demand curve, while small, might be nonzero. This could be true if, for example, the balance sheet costs of the marginal borrower in overnight money markets were upward-sloping with respect to that bank’s balance sheet size. I see this as a reasonable possibility, and therefore I think it might be possible that the decline in reserve balances has pushed up overnight rates a bit over time. 22 Figure 11 provides some evidence of this dynamic; as the level of reserve balances has declined, the spread between the rate of interest paid on reserves and the volume-weighted average federal funds rate has narrowed.