A facility can also help to alleviate some of the frictions that may curb the effectiveness of IOER in a system with large levels of excess reserves by enhancing market competition through a strengthening of large cash lenders’ bargaining positions, and by reducing the amount of reserves held by banks and therefore associated balance sheet costs. Third: A 25 basis point target range for the federal funds rate bounded by the IOER and ON RRP rates. Framing the stance of policy in terms of the federal funds rate focuses monetary policy on a rate that is familiar to the public. Meanwhile, setting a target range, rather than a  4  Congress granted the Federal Reserve the authority to pay interest on reserve balances held by depository institutions in 2006, with an effective date of October 2011. The implementation of this ruling was accelerated to October 2008 during the financial crisis to enhance the Federal Reserve’s ability to control short-term interest rates amid the reserve-expanding credit programs and asset purchases it initiated at that time. Although the rates of interest on required reserve balances and excess reserve balances are currently equal, they need not be the same. 5  I spoke about these dynamics in December 2013 and October 2014 speeches, available at http://www.newyorkfed.org/newsevents/speeches/2013/pot131202.html and http://www.newyorkfed.org/newsevents/speeches/2014/pot141007.html. 6  When the Desk conducts a reverse repo transaction, it sells Treasury securities held in the SOMA under an agreement to repurchase the securities at a pre-determined price.
Figure 6 Interest rates in pesos and dollars in the local market (percentage) 14  14  12  12  10  10  8  8  6  6  4  4  2  2  0  0  Jan.08  Apr.08  Jul.08  Oct.08  Stock Exchange-90 days  Jan.09  Apr.09  Jul.09  Oct.09  Libor + 90-day on-shore spread  Sources: Bloomberg and Central Bank of Chile. 8  BIS Review 145/2009  Table 1 Monetary policy rate and expectations according to EES (percentage) Actual level  Expected for Expected 2 same month months ahead  Expected for Dec.09  Oct. 2008  8.25  8.50  8.50  7.00  Dec. 2008  8.25  8.25  7.75  6.25  Feb. 2009  4.75  6.25  5.00  4.00  Nov. 2008  8.25  Jan. 2009  8.25  7.25  Mar. 2009  8.25  7.50  2.25  6.75  3.13  2.50  6.63 5.50  2.00  Source: Economic Expectations Survey (EES), Central Bank of Chile.