For many years prior to the global financial crisis, the Federal Open Market Committee set a target for the federal funds rate and achieved that target through small purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve's large-scale asset purchase programs, this approach to implementing monetary policy will no longer work. This paper provides a primer on the Fed's implementation of monetary policy. We use the standard textbook model to illustrate why the approach used by the Federal Reserve before the financial crisis to keep the federal funds rate near the Federal Open Market Committee's target will not work in current circumstances, and explain the approach that the Committee intends to use instead when it decides to begin raising short-term interest rates.

The Federal Reserve conducts monetary policy in order to achieve its statutory mandate of maximum employment, stable prices, and moderate long-term interest rates as prescribed by the Congress and laid out in the Federal Reserve Act. For many years prior to the financial crisis, the FOMC set a target for the federal funds rate and achieved that target through small purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve's large scale asset purchase programs, this approach to implementing monetary policy will no longer work. This paper provides a primer on the Fed's implementation of monetary policy. We use the standard textbook model to illustrate why the approach used by the Federal Reserve before the financial crisis to keep the federal funds rate near the FOMC's target will not work in current circumstances, and explain the approach that the Committee intends to use instead when it decides to begin raising short-term interest rates.

Liquidity management-ensuring access to sufficient quantities of assets that can be converted easily and quickly into cash with little or no loss of value-has always been a key component of banks' balance sheet management. However, liquidity management has become an even more important consideration in banks' operations in the wake of the Global Financial Crisis of 2007-09 with the introduction of new regulations aimed at ensuring banks' ability to meet their cash and collateral obligations during times of financial stress. In particular, beginning in 2015, large banks in the United States have needed to comply with the liquidity coverage ratio (LCR) by holding sufficient "high-quality liquid assets" (HQLA), a requirement Banks' liquidity management practices are fundamental to understanding the implementation and transmission of monetary policy. Since the Global Financial Crisis of 2007-09, these practices have been shaped importantly by the liquidity coverage ratio requirement. Given the lack of public data on how banks have been meeting this requirement, we construct estimates of U.S. banks' high-quality liquid assets (HQLA) and examine how banks have managed these assets since the crisis. We find that banks have adopted a wide range of HQLA compositions and show that this empirical finding is consistent with a risk-return framework that hinges on banks' aversion to liquidity and interest rate risks. We discuss how various regulations and business model choices can drive HQLA compositions in general, and connect many of the specific compositions we see to banks' own public statements regarding their liquidity strategies. Finally, we highlight how banks' preferences for the share of HQLA met with reserves affect the Fed's monetary policy implementation framework. (JEL E51, E58, G21, G28)