Views expressed do not necessarily reflect official positions of the Federal Reserve System.
The recent turmoil in the subprime mortgage market has
had implications for the federal funds market. An appar-
ent flight to “safe” investments caused the federal funds
rate to behave somewhat differently from what one might
expect during a “liquidity crisis.” Specifically, in the wake of
these developments, the rates on alternative sources of funds
for depository institutions rose, while the federal funds rate
dropped—falling and remaining below the FOMC’s target of
5.25 percent. The funds rate fell without any unusual open mar-
ket operations (OMOs) or adjustment to the funds rate target.
To measure the effect that OMOs have on bank reserves
and therefore the federal funds rate, I calculate the OMO
maintenance-period effect, which is the sum of all securities
purchased or sold by the New York Fed on a given day, each
of which are multiplied by their own maturity; the sum is then
divided by 14—the number of days in the reserve maintenance
period (the period over which bank reserves are measured). This
value shows the cumulative effect that one day’s OMOs has on
bank reserves over the entire maintenance period. The chart
shows daily data since January 2007 of the effective federal
funds rate, the FOMC’s funds rate target, and the 4-week second-
ary market T-bill rate—as well as the New York Fed’s effective
OMOs for the maintenance period.
Although the funds rate target was 5.25 percent on August
9, the chart shows that the effective funds rate was 5.41 percent,
even though the Fed increased the supply of reserves by pur-
chasing $24 billion in assets on that day.
Because $12 billion of these transactions
had a 14-day maturity, while the other
$12 billion had an overnight maturity,
the OMO maintenance-period effect of
these purchases was $12.86 billion. The
next day, the Fed purchased $38 billion
in assets, with an effect of $8.14 billion.
The funds rate averaged 4.68 percent,