Transmission of Monetary Policy Feds Lift-off and Collateral Reuse

Manmohan Singh

This article was first published as a chapter in Collateral and Financial Plumbing (2nd Impression) on 7 September 2016 by Risk Books

Introduction

Many recent studies focus on the tools available to the Federal Reserve (Fed) for lift-off, ie, the gradual increase in its policy rate after several years of keeping it at zero (eg, Frost et al 2015). Some studies and policymakers link the lift-off issues with financial stability elements where they allude to the academic literature on the need for safe assets (Stein 2014; Caballero and Fahri 2013). Recent FOMC minutes, academic studies and speeches by the Fed discuss these issues in detail.

However, aside from analysis by market participants that generally favour a large supply of safe assets, there is limited discussion about the financial plumbing connecting bank and non-bank balance sheets, or the changes to those balance sheets stemming in part from proposed regulations such as the leverage ratio and the liquidity coverage ratio (LCR). This chapter looks at the reshuffling of the banknon-bank nexus that is likely to occur as a result of the Feds increasing role in dealing directly with non-banks.

As background, in the