Fed: We Are Doing This ‘Cause We Are Tapped Out

Initially, the Federal Reserve was able to prevent excess balances from expanding as the use of its new liquidity facilities grew by reducing other assets it held on its balance sheet, notably holdings of U.S. Treasury securities. But many of its remaining holdings of Treasury securities are now dedicated to support the Term Securities Lending Facility and other programs.

More recently, the Supplemental Financing Program has been invaluable in helping to limit the growth in excess balances as use of the Federal Reserve’s liquidity programs has continued to expand. Under the Supplemental Financing Program the U.S. Treasury has issued Treasury bills in the market and deposited the proceeds in an account at the Federal Reserve.

But payment of interest on excess balances could enable the Desk to achieve the operating target for the federal funds rate even without further use of these other measures and in principle with any level of excess balances. And in addition to remunerating excess balances, the Federal Reserve is exploring other methods to manage reserve levels for the purpose of implementing monetary policy with its authority to pay interest on reserves.