Greater and more elastic supply of ultralow-risk assets through these channels likely helped smooth out the effects of the expansion of government money market funds that I noted earlier. Evidence of the efficacy of policy transmission: views from Duffie and Krishnamurthy Recently, numerous academic papers have explored the functioning of money markets in the post-crisis environment, and have sought to investigate—both theoretically and empirically—how structural shifts like those I have discussed will affect the Federal Reserve’s approach to policy implementation. Darrell Duffie and Arvind Krishnamurthy presented a particularly notable empirical and theoretical study at last year’s Jackson Hole conference.26 Darrell and Arvind’s central empirical observation was that money rates have become more dispersed. (Figure 9), which shows a selection of overnight money market rates, illustrates some of this dispersion. Darrell and Arvind use a broad selection of market rates, assembled from various sources and adjusted in a number of ways to make them comparable to each other, to construct what they call a “dispersion index” of money market rates, shown in (Figure 10). This series is calculated as a weighted mean absolute deviation across these rates. This metric shows that, according to their measure, dispersion across money markets has risen since late 2015, around the time the FOMC began the process of policy normalization and money market funds started to change their business models in anticipation of the new SEC rules. Based on these data and on theoretical modeling, Darrell and Arvind conclude that monetary transmission may be less efficient than it was before the crisis.
Today I will discuss these structural developments, and evaluate the continued efficacy of the Federal Reserve’s policy implementation framework in light of their effects on money market competition and integration. I’ll briefly review the means by which we implement policy, and the reasons why we do so differently now from before the financial crisis. I’ll explain why changes in money market structure could conceivably impair the transmission of monetary policy. We will see that the impact of many of the recent structural developments were smoothed by the presence of the Federal Reserve’s overnight reverse repurchase facility. Then, I will take you through some data about money market dispersion to see what effect these developments had in practice. The takeaway from all this is clear: our framework remains highly effective, and has proved quite resilient, even to these significant shifts in market structure. It continues to provide the FOMC with excellent control over money market rates. Indeed, the effective federal funds rate remained within the FOMC’s target range 100 percent of the time in 2016 and this has continued so far this year, as shown in (Figure 1). Changes in the federal funds rate continue to transmit in a predictable way to other money market rates, thereby affecting, as intended, the broad financial conditions upon which the price and quantity of private sector credit depend. However, recent evidence on dispersion in overnight and term rates suggests that we should continue to monitor the transmission of the FOMC’s policy stance into money market rates carefully.