FED
The NY Fed today released its first monthly estimates of reserve demand elasticity (which they abbreviate as RDE - webpage here). In short, the NY Fed uses daily data on reserve balances held by depository institutions ("daily information on federal funds transactions and aggregate balances held by depository institutions is confidential"), and the daily volume-weighted average of the Fed funds rate based on transactions data collected by the NY Fed.
- They then calculate the elasticity of the Fed funds rate to the supply of reserves: the figures show "by how many basis points the spread between the federal funds and IORB rates would move for an increase in aggregate reserves equal to 1 percent of banks’ total assets."
- In other words, this is the slope of the reserve demand curve. When this figure is zero - ie the slope is flat - the Fed funds rate does not respond to changes in the supply of reserves and reserves are seen as abundant. When it is negative, it suggests that reserves are scarce, as borrowers on the Fed funds market are willing to pay higher rates. And "Between these two regions, an intermediate regime–that we refer to as “ample”–emerges, where the demand curve exhibits a modest downward slope. "
- To give some examples from the chart below (data goes back to 2010):
- until 2012 the slope was very negative but returned to zero as Fed QE increased the quantity of reserves, leading to a flat sloping reserve demand curve by mid-decade
- in 2018-19 the curve went increasingly negative over the course of several months as QT started in 2017 ran its course, culminating in the Fed's decision to halt QT and resume increasing the size of the balance sheet in order to keep reserves abundant. Over that period reserves had fallen from around $2.3T to around $1.5T.
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