Monetary Policy Implementation with Ample Reserves

YiLi Chien and Ashley Stewart

Review, 2025, vol. 107, issue 8, 11 pages

Abstract: The Federal Reserve currently implements its interest rate policy under a framework known as the floor system. In order for the floor system to operate smoothly, there must be sufficient liquidity in the federal funds market. The ongoing goal of quantitative tightening (QT) is to reach the minimal level of market liquidity required to implement monetary policy efficiently and effectively, also known as an ample reserves regime. We briefly discuss changes in the monetary policy framework from the previous corridor system to today’s floor system as well as the circumstances that brought them about. Finally, this article complements the literature by proposing that liquidity changes in the composition of bank deposits since the COVID-19 pandemic, paired with modifications in savings account regulation, play an important role in increasing the demand for bank reserves, thus raising the threshold for what may be considered ample. A simple econometric analysis confirms our conjecture. Therefore, the composition of bank deposits should be considered when performing QT policy.

Keywords: monetary policy; floor system; federal funds market; quantitative tightening; ample reserves regime (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlrv:100054

DOI: 10.20955/r.2025.08

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