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MNI BRIEF: NY Fed Offers Tool To Measure Reserves 'Ampleness'

(MNI) WASHINGTON

Interest rate spreads alone are not reliable indicators of when the level of reserves in the banking system are too low to the point when it may cause money market rates to jump like in late 2019, New York Fed President John Williams said in a blog post along with coauthors, instead highlighting the need to estimate changing demand sensitivity from banks for reserves.

Noting that the demand for reserves is highly nonlinear and has shifted due to regulation, supervision, and internal risk-management frameworks, Williams and coauthors Gara Afonso and Gabriele La Spada offer a method to measure the slope of the demand curve daily to assess when bank system reserves may be too low, indicating that current reserve levels remain ample. (See: MNI: Fed To Press Ahead With QT Amid Liquidity Concerns)

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Interest rate spreads alone are not reliable indicators of when the level of reserves in the banking system are too low to the point when it may cause money market rates to jump like in late 2019, New York Fed President John Williams said in a blog post along with coauthors, instead highlighting the need to estimate changing demand sensitivity from banks for reserves.

Noting that the demand for reserves is highly nonlinear and has shifted due to regulation, supervision, and internal risk-management frameworks, Williams and coauthors Gara Afonso and Gabriele La Spada offer a method to measure the slope of the demand curve daily to assess when bank system reserves may be too low, indicating that current reserve levels remain ample. (See: MNI: Fed To Press Ahead With QT Amid Liquidity Concerns)

Keep reading...Show less