| Limited Reserves Framework to an Ample Reserves Framework Phase 3 2008 - 2020 |
| Transitioning from a Limited Reserves Framework to an Ample Reserves Framework |
| Events that Leading Up to this Transition (2005 - 2008) |
| September 23, 2008 - November 15, 2008 (2 months) |
| December 18, 2008 - December 6, 2015 (7 years) |
| December 18, 2015 - March 1, 2020 (4.25 years) |
Prior to October 2008, the Federal Reserves (Fed) operated in a Limited Reserves Framework where banks were
required to hold a certain percentage of their demand deposits on reserve, entitled the Reserve Requirement (RR).
required to hold a certain percentage of their demand deposits on reserve, entitled the Reserve Requirement (RR).
Because of the financial troubles between 2005 and becoming more troubling though 2007 and 2008, when in
September 2008, the Federal Reserve lowered the FFR TARGET to near zero. Most importantly, the FOMC went
from setting a single FFR TARGET RATE to setting a FFR TARGET RANGE, with the upper limit and lower limit
on the range consistently 0.25 percentage points or 25 basis points apart.
October 1, 2008: The Federal Reserve was authorized to pay interest on both Required Reserves (IORR) and interest
on Excess Reserves (IOER), a policy that originally had a 2011 start date but was accelerated to October 1, 2008 in
response to the financial crisis. This was a key step forward in moving from a Limited Reserves Framework to a
newer monetary policy framework, the Ample Reserves Framework. With this new framework of ample reserves
rather than scarce or limited reserves, the Fed found a new way to influence short-term interest rates by managing
the supply of reserves in the banking system.
September 2008, the Federal Reserve lowered the FFR TARGET to near zero. Most importantly, the FOMC went
from setting a single FFR TARGET RATE to setting a FFR TARGET RANGE, with the upper limit and lower limit
on the range consistently 0.25 percentage points or 25 basis points apart.
October 1, 2008: The Federal Reserve was authorized to pay interest on both Required Reserves (IORR) and interest
on Excess Reserves (IOER), a policy that originally had a 2011 start date but was accelerated to October 1, 2008 in
response to the financial crisis. This was a key step forward in moving from a Limited Reserves Framework to a
newer monetary policy framework, the Ample Reserves Framework. With this new framework of ample reserves
rather than scarce or limited reserves, the Fed found a new way to influence short-term interest rates by managing
the supply of reserves in the banking system.
December 2008: As the financial crisis deepened, the Federal Reserve began using the IORB tool in conjunction with a
Federal Funds TARGET RANGE -- Upper Limit and Lower Limit (not a single Federal Funds TARGET RATE), which was
set at 0% to 0.25% in December 2008. This marked a shift away from the previous system of targeting a single FFR.
December 2015: At the FOMC meeting in December 2015, the committee decided that economic conditions and the economic
outlook warranted taking the first step in normalizing the stance of monetary policy; accordingly, the Committee voted to
raise the Federal Funds TARGET RANGE Upper and Lower Limits for the first time since December 2008.
In its meeting notes it stated, "The Committee intends that the Federal Reserve will, in the longer run, hold no more
securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury
securities."
Federal Funds TARGET RANGE -- Upper Limit and Lower Limit (not a single Federal Funds TARGET RATE), which was
set at 0% to 0.25% in December 2008. This marked a shift away from the previous system of targeting a single FFR.
December 2015: At the FOMC meeting in December 2015, the committee decided that economic conditions and the economic
outlook warranted taking the first step in normalizing the stance of monetary policy; accordingly, the Committee voted to
raise the Federal Funds TARGET RANGE Upper and Lower Limits for the first time since December 2008.
In its meeting notes it stated, "The Committee intends that the Federal Reserve will, in the longer run, hold no more
securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury
securities."
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In December 2015, the FOMC raised the Federal Funds TARGET RANGE -- Upper and Lower Limits for the first time
since the global financial crisis, but this action was part of the transition from a Limited Reserves Framework to an Ample
Reserves Framework. The Ample Reserves Framework was effectively in place after the crisis, but the FOMC formally
adopted it as the Ample Reserves REGIME in January 2019.
since the global financial crisis, but this action was part of the transition from a Limited Reserves Framework to an Ample
Reserves Framework. The Ample Reserves Framework was effectively in place after the crisis, but the FOMC formally
adopted it as the Ample Reserves REGIME in January 2019.
| Steven M. Reff Economics Lecturer University of Arizona (2007 - 2016) The 2015 University of Arizona Five-Star Faculty Award |