The Fed Has Two Tools to Influence Money Market Conditions

Adam Copeland and Owen Engbretson

No 20260406, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: The Federal Reserve’s 2022-23 tightening cycle involved the use of two monetary policy tools: changes in administrative rates and changes in the size of its balance sheet. This post highlights the results of a recent Staff Report that explores how these tools affect money market conditions. Using confidential trade-level data, we find that both tools have significant effects on the pricing of funds sourced through repo. These results suggest that the Fed can manage how financing conditions are affected even as it influences economic conditions. For example, the Fed can lower its administrative rates to loosen economic conditions, while shrinking its balance sheet to maintain financing conditions in the money markets.

Keywords: repo; liquidity risk premium; rate pass-through; short-term funding (search for similar items in EconPapers)
JEL-codes: E58 G23 (search for similar items in EconPapers)
Date: 2026-04-06
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednls:103002

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DOI: 10.59576/lse.20260406

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