One tentative indication that high capacity may be playing an important role is that unsecured rates appear to have settled in about the same position relative to IOR as before liftoff, even though one might have expected the widening in the IORON RRP spread and the lower support from the ZLB to result in some downward shift. The ON RRP also has a per-counterparty cap, which was, and is, $ billion. It seems that the current level of the per-counterparty cap was also adequately large for perceived individual “headroom,” thereby supporting lender bargaining power. Figure 14 shows summary data on how frequently we receive large bids in our operations at the ON RRP and term RRP facilities. As you can see, we rarely see bids of more than $ billion, and combined individual counterparty usage across overnight and term operations has never exceeded $ billion. Recently, we learned a bit about the term RRP operations. We have been conducting these over quarter-ends as a way of providing additional RRP capacity. Additional capacity is available because term RRP operations are subject to a separate overall size limit, and because there is no per-counterparty cap in those operations. Counterparties appear to regard these as close substitutes for ON RRPs, and as shown in Figure 15, we’ve typically seen that overall RRP take-up, across overnight and term RRP, has been fairly stable across quarterends. At this past year-end, there was essentially no take-up at the term RRP operations.
This way, expectations for the FOMC’s future policy stance will be properly incorporated into the term structure of interest rates, and thereby appropriately affect broad financial conditions and the broader economy. It’s not necessary that the effective rate stay within the target range each and every day. Before the crisis, there was usually a bit of variability in the effective rate owing to limitations on the Desk’s ability to achieve completely precise daily forecasts for reserve demand. Now, as I said earlier, the FOMC sets the target as a range, not as a point value. The federal funds rate can vary within that range, and it could even move outside that range on occasion, without materially affecting the economy.25 We have instituted a data-driven, cross-market framework for evaluating interest rate control. In unsecured markets, we gather daily, transaction-level data through a new Federal Reserve statistical collection called the FR 2420. These rich data give us much greater insight than we had before the crisis about how these markets are structured, which is important to developing and maintaining an operating regime based on improving competition among borrowers in money markets, in the context of a large amount of reserves and substantial ongoing regulatory and business model changes. Monetary control does not stop at the effective federal funds rate: The Federal Reserve also wants to ensure that the stance of monetary policy is passed through into other money market rates.