Floor System Fed

Hence the supply of federal funds has no effect on the ffr so long as the fed is operating in a floor system.

Floor system fed.

Instead it must adjust the interest rate it pays on reserves. If it increases the rate it pays on reserves the federal funds rate will. To affect the federal funds rate in a floor system the fed cannot rely on open market operations. Fed s pre 2008 corridor system.

Today s post is the second in a two part series on how the federal reserve influences interest rates. The fed s operating system changed from a corridor system to a floor system in 2008 i e from a system where money in the form of reserves mattered for monetary policy to one in which money. Over the long term however the fed should find another approach to policy implementation. A more detailed discussion of these efficiency concerns and other differences between corridor type and floor type systems can be found in two federal reserve publications divorcing money from monetary policy and understanding monetary policy implementation leaky ceilings and soggy floors.

In this system the demand curve of the bank reserve market is downward sloping with respect to the interbank interest rate. The floor system has worked well so far in re normalizing the fed s policies after the extended period of exceptionally low interest rates made necessary by the financial crisis.