As of Monday, the per-counterparty maximum bid limit was raised from $ billion to $ billion, and an overall size limit of $ billion was imposed for each operation. If the total amount of bids received in an operation is less than or equal to the $ billion size limit, awards will be made at a fixed offering rate. However, if the total amount of bids received exceeds the overall operation size limit, the $ billion in ON RRPs will be allocated through a single-price auction using interest rates that counterparties now include with their bids. Awards are made at a “stopout rate” – the rate at which the overall size limit is achieved – with all bids below this rate awarded in full and all bids at this rate awarded on a pro rata basis. The stopout rate is determined by evaluating all bids in ascending order by submitted rate up to the point at which the total quantity of offers equals the overall size limit. 12 The Federal Reserve will be closely analyzing the results of the ON RRP exercise conducted under these new testing parameters in order to further its understanding of how an ON RRP facility might best be structured during the initial stages of the normalization process. In addition, the Federal Reserve Board has been testing a facility through which it offers term deposits to credentialed depository institutions. Term Deposit Facility (TDF) transactions could be used to temporarily reduce the quantity of reserve balances.
Thus, the current size and composition of the Federal Reserve’s balance sheet actually create strong incentives to adjust policy in a timely way. A far more important threat to central bank independence than the use of unconventional monetary policy is whether the fiscal authorities act in a manner consistent with the central bank’s objectives. As recent history has shown, central banks may not be able to achieve their objectives when an inconsistent fiscal regime is in place. That is, monetary and fiscal authorities need to share the same objectives. When the objectives differ, fiscal dominance  BIS central bankers’ speeches  3  can become a major problem for the central bank. For example, if the budget trajectory were clearly unsustainable, then monetary policy may no longer be able to credibly act in a way that keeps inflation expectations in check. But I don’t think the issue of fiscal dominance is linked back to whether the central bank pursues unconventional monetary policies or not. At the end of the day, I think that the best way to maintain independence is for central bankers to use all their available monetary policy tools, including unconventional monetary policy tools when needed, to best achieve their objectives. The historical record is clear: Central bank independence tends to lead to better monetary policy outcomes. But, the causality also runs in reverse: Good monetary policy outcomes help ensure monetary policy independence. Thank you for your attention. 4  BIS central bankers’ speeches