Williams clarifies future reserve management purchases will not represent a change in monetary policy stance.
“Such reserve management purchases will represent the natural next stage of the implementation of the FOMC’s ample reserves strategy and in no way represent a change in the underlying stance of monetary policy.”
Williams says ample reserves lie between $1.5 trillion and the current $3.2 trillion level.
“As I said, it’s hard to estimate exactly what constitutes an ample level of reserves. We know that number is lower than the current $3.2 trillion, since market indicators still point to reserves remaining abundant.”
Williams explains runoff stoppage aligns with 2022 plan to end when reserves reach somewhat above ample.
“In its May 2022 plans, the Committee stated that it would stop runoff when reserves were somewhat above an ample level.”
Williams says Treasury expects TGA balances could peak around $1.025 trillion by late April, drawing down reserves.
“Treasury recently estimated that TGA balances could peak around $1.025 trillion by late April, amid tax season inflows, likely resulting in a notable drawdown in reserves.”
Williams clarifies future reserve management purchases will not represent a change in monetary policy stance.
“Such reserve management purchases will represent the natural next stage of the implementation of the FOMC’s ample reserves strategy and in no way represent a change in the underlying stance of monetary policy.”
Williams notes Treasury estimates TGA balances could peak around $1.025 trillion by late April, drawing down reserves.
“In fact, the U.S. Treasury recently estimated that TGA balances could peak around $1.025 trillion by late April, amid tax season inflows, likely resulting in a notable drawdown in reserves.”
Williams reiterates his main finding that uncertainty increases optimal reserves without a lending facility.
“First, absent a lending facility, the optimal supply of reserves under uncertainty is greater than it would be absent uncertainty.”
Williams explains lending facility rate relative to target spread determines precautionary reserve needs and facility usage.
“This effect is greatest when the lending rate is closer to the target spread. On the other hand, if the lending rate is very high relative to the target spread, then the facility is rarely used, and the optimal supply of reserves is near what it would be absent a facility.”
Williams states optimal reserve supply under uncertainty is unequivocally higher than without uncertainty when no lending facility exists.
“Absent a lending facility, the optimal supply of reserves under uncertainty is unequivocally higher than it is without uncertainty.”
Williams says gradual asset purchases will follow to maintain ample reserves as Fed liabilities grow over time.
“It will then be time to begin the process of gradual purchases of assets that will maintain an ample level of reserves as the Fed’s other liabilities grow and underlying demand for reserves increases over time.”
Williams notes the SRF was used at June quarter end and mid-September as reserve levels fall.
“But as reserve levels fall this is shifting somewhat, with the SRF used at the recent June quarter end and at the mid-September tax date.”
Williams notes TGA rises $175-400 billion during April tax season then declines gradually.
“Over the past several years, the TGA has risen by somewhere between roughly $175 billion and $400 billion during April tax season and has gradually declined back to more normal levels thereafter ( Panel 11 ).”
Williams reports Standing Repo Facility usage rose from zero to higher frequency over past two months.
“Over the past two months, SRF usage has risen from essentially zero to having greater frequency and higher volume of take-up, especially on days of temporary repo market pressures,”
Williams notes the Standing Repo Facility has been little used because reserves remained abundant.
“The SRF has been much less extensively used than the ON RRP to date, since reserves have been abundant over recent years.”
Williams says high uncertainty can make abundant reserves optimal even when target spread suggests ample reserves region.
“Indeed, if the uncertainty is great enough, the optimal level of reserves can exceed the cutoff for abundant reserves under no uncertainty.”
Williams says the FOMC determined in December that reserves had reached ample levels after three years of runoff.
“After more than three years of balance sheet reduction, the FOMC ended runoff last fall, then determined in December that reserves had reached ample levels, consistent with the principles and plans it had outlined in 2022.”
Williams expects Fed to reach ample reserves soon based on sustained repo market pressures.
“Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves.”
Williams says the Fed will probably need to start expanding the portfolio soon to meet growing reserve demand.
“The exact timing will depend on several factors, but, as President Williams said, given what we know today we probably won’t have to wait long.”
Williams concludes there is no single best way to supply reserves across different jurisdictions.
“In other words, there is no single best way to supply reserves; rather, the best mix of tools depends on circumstances and policy preferences unique to each jurisdiction.”
Williams monitors fed funds, repo market, and payments indicators to assess reserve demand conditions.
“I am closely monitoring a variety of market indicators related to the fed funds market, repo market, and payments to help assess the state of reserve demand conditions.”
Williams says Fed will begin gradual asset purchases to maintain ample reserves once that level is reached.
“Looking forward, the next step in our balance sheet strategy will be to assess when the level of reserves has reached ample.”
Williams argues mean spread equaling target does not prove policy optimality under uncertainty.
“Therefore, one cannot judge whether the policy is optimal simply because the mean spread equals its target.”
Williams says non-reserve liabilities have swung by up to $460 billion over one-month periods recently.
“In recent years, aggregate non-reserve liabilities (excluding ON RRP) have increased by as much as about $250 billion on certain days and by as much as roughly $460 billion over a rolling 1-month time horizon ( Panel 10 ).”
Williams explains ample reserves deliver adequate liquidity to maintain rate control and smooth functioning.
“In the Fed’s monetary policy implementation framework, an ample supply of U.S. dollar reserves delivers adequate liquidity to the banking system, helping to maintain rate control and smooth market functioning.”
Williams explains banks consider market conditions, incentives, and payment needs when deciding reserve levels.
“Banks consider a range of factors when deciding on the level of reserves that they wish to hold, including market conditions, financial incentives, and their ability to make payments and fund outflows in both normal times and during stress.”
Williams says Fed will begin gradual asset purchases once reserves reach ample level to maintain that level.
“It will then be time to begin the process of gradual purchases of assets that will maintain an ample level of reserves”
“Today, reserves total around $2.9 trillion, as shown on the right side of the stylized balance sheet ( Panel 2 ).”
Williams expects Fed will reach ample reserves soon based on sustained repo market pressures.
“Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves.”
Williams says ample reserves are substantially higher than the $1.5 trillion that proved insufficient in 2019.
“But we also know it is substantially larger than the $1.5 trillion level to which reserves dipped in September 2019, when they evidently became less than ample.”
Williams details rapid liquidity drain: ON RRP fell from $200 billion to near zero, reserves dropped $350 billion.
“Between early July and mid-September—when the TGA reached around $800 billion—the ON RRP fell from a balance of about $200 billion to de minimis levels, and reserves fell by $350 billion.”
Williams explains lending facilities cap the spread, mitigating the precautionary motive for holding reserves.
“With a lending facility, the choice of the optimal supply of reserves takes into account the fact that the spread is capped at the lending rate.”