As a result, the size of the fed funds market has declined relative to pre-crisis levels and the nature of most fed funds activity has changed. Nevertheless, trading volumes remain reasonably robust. Since July 2014, the average overnight borrowing in the fed funds market that banks report to the Fed through our FR 2420 reporting form has been roughly $ billion, with an average of about 300 transactions per day (Figure 7). 22 Moreover, longerterm correlations between fed funds and other money market rates remain robust, with the fed funds rate remaining a suitable measure of banks’ marginal borrowing costs. A variety of regulatory changes and other developments have also influenced motivations for participating in fed funds and other money markets. Liquidity and capital rules affect the management of bank balance sheets and the costs of many money market transactions, affecting banks’ incentives to engage in short-term borrowing, arbitrage between different money market rates, and provide customers access to their balance sheets. Notably, regulatory changes affect different institutions in different ways. For example, changes to the calculation of FDIC deposit insurance assessment fees affect primarily domestic banks. The implementation of Basel III banking standards also varies by jurisdiction, so the rules for foreign bank branches operating in the United States are somewhat different than those for domestic institutions. 23 The effects of regulatory requirements on money market dynamics can be seen especially around key financial reporting dates. As many market commentators have noted, some borrowers actively manage their balance sheets on quarter-end dates.
The Committee noted that an ON RRP facility will be used only to the extent necessary and will be phased out once it is no longer needed to help control the federal funds rate. With respect to the Fed’s balance sheet, the Committee intends to reduce securities holdings in a gradual and predictable manner, primarily by ceasing to reinvest repayments of principal on securities held in the SOMA. 3 In the longer run, the Committee intends that the Federal Reserve will hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities. The March 2015 minutes augment the September Principles and Plans with additional details about the FOMC’s intended operational approach at the commencement of policy firming. Specifically, the Federal Reserve intends to target a range for the federal funds rate that is 25 basis points wide, and to set the IOER rate and the offering rate associated with an ON RRP facility equal to the top and bottom of the target range, respectively. It intends to allow aggregate capacity of the ON RRP facility to be temporarily elevated to support policy implementation. It can also adjust the IOER rate and parameters of the ON RRP facility, and to use other tools such as term operations, as necessary for appropriate monetary control based on policymakers’ assessments of the efficacy and costs of their tools.