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With the use of nontraditional policy tools, the level of reserve balances has risen significantly in the United States since 2007. Before the financial crisis, reserve balances were roughly $20 billion whereas the level has risen well past $1 trillion. The effect of reserve balances in simple macro-economic models often comes through the money multiplier, affecting the money supply and the amount of bank lending in the economy. Most models currently used for macro-economic policy analysis, however, either exclude money or model money demand as entirely endogenous, thus precluding any causal role for reserves and money. Nevertheless, some academic research and many textbooks continue to use the money multiplier concept in discussions of money. We explore the institutional structure of the transmission mechanism beginning with open market operations through to money and loans. We then undertake empirical analysis of the relationship among reserve balances, money, and bank lending. We use aggregate as well as bank-level data in a VAR framework and document that the mechanism does not work through the standard multiplier model or the bank lending channel. In particular, if the level of reserve balances is expected to have an impact on the economy, it seems unlikely that a standard multiplier story will explain the effect. [ABSTRACT FROM AUTHOR]

A general trend toward increased transparency and gradualism has been maintained in the Federal Reserve. The authors of this paper examine the implications of these historical developments for the anticipation of monetary policy actions and adjustment of interest rates. They use a theoretical framework to establish the Federal Reserve's ability to manipulate overnight rates by means of an anticipation effect. The anticipation effect is defined as interest rate adjustments that occur before a policy announcement due to market's improved ability to predict future policy actions. Results indicate that most market rates adjust to anticipated policy actions before the actual announcement. The authors suggest that because the market responds to policy announcements instantly, the Trading Desk does not need to act immediately after the target change and can wait until the market incorporates the new information that comes with the policy announcement. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

This paper contends that the Federal Reserve manipulated fund rates by public disclosures of the new level of the Federal funds rate target and the announcement effect. The authors describe this effect as the portion of interest rate movements associated with public statements on interest rate targets that do not necessitate traditional open market operations for their support. Evidence is presented on how the Federal Reserve uses the liquidity effect together with the announcement effect to execute monetary policy. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.