With the large levels of excess reserves in the system, certain institutional aspects of money markets in the United States – including bank-only access to IOR, credit limits imposed by lenders and other impediments to market competition, and the costs of balance sheet expansion – appear to create frictions that have made IOR act more like a magnet that pulls up short-term interest rates than a firm floor beneath them. Thus, in considering how to implement policy normalization, the Federal Reserve evaluated a variety of ways to increase competition for funds among borrowers and thereby improve the control provided by IOR.12 The Federal Reserve initially considered an approach to policy normalization that was based on a combination of term operations and asset sales or redemptions aimed at making reserves sufficiently scarce so that, once the FOMC decided to tighten monetary policy, this tightening could be implemented using IOR within a framework that was otherwise similar to that used before the crisis.13 As part of this approach, the Federal Reserve acquired a new set of reverse  2  BIS central bankers’ speeches  repo counterparties, including money market funds and government-sponsored enterprises, in addition to the primary dealers with which it had traditionally transacted. These new counterparties were major investors of cash in overnight markets and had capacity to facilitate the “draining” of substantial reserve balances, if offered attractive term investments with the Federal Reserve.
Such assessments are further complicated by the fact that there have been a number of important structural changes in the mortgage markets. Without going into detail, weighing the available evidence together, we do not think that residential property in Sweden is significantly overpriced in general. Nor do we believe that households in general are overly indebted. However, this does not preclude the possibility that there are other countries where house prices and household indebtedness have risen to levels beyond what can be fundamentally motivated. Yet, even if we don’t believe that house prices and household indebtedness have been disconnected from their fundamental drivers, there are still reasons for us to be concerned by the rise in property prices and household indebtedness. In the last years, in Sweden as elsewhere, household debt has grown much faster than disposable income. Obviously, this is not sustainable in the long run, as households then ultimately would be unable to service their debts. In the long run it is likely that indebtedness and house prices will increase roughly at the same rate as the nominal growth of the economy. This type of adjustment, to more restrained growth rates, will normally occur smoothly, as households begin to feel that their finances cannot tolerate a higher level of indebtedness. However, if there is an overly sharp correction or “hard landing” if you like, it could lead to weak growth in the economy for a long period of time. In this case, it would also have effects on inflation.