New York Fed’s Williams Says Rate-Control Toolkit Is Working Well in Ample-Reserves Regime

New York Federal Reserve President John Williams said the Federal Reserve’s ample-reserves operating framework and its current set of tools are working well to control short-term interest rates, while stressing that the system can be adjusted as financial markets evolve. His remarks focused on how monetary policy is implemented rather than on where the Federal Open Market Committee should take interest rates next.

Williams delivered the comments Tuesday at the 2026 U.S. Treasury Market Conference at the New York Fed. According to Reuters, which reviewed his prepared remarks, Williams described the framework as highly effective at maintaining interest-rate control and supporting smooth functioning in core financial markets. The official event schedule listed no question-and-answer session following his remarks.

The discussion comes less than a week after the FOMC raised its target range for the federal funds rate by a quarter percentage point to 3.75% to 4.00%. That policy decision determines the stance of monetary policy. The operating framework Williams discussed is the machinery used to keep overnight rates aligned with that stance.

How the Fed’s floor-and-ceiling tools work

Under an ample-reserves regime, the Federal Reserve supplies enough reserve balances that short-term rates can be controlled primarily through administered rates rather than through frequent attempts to fine-tune the quantity of reserves. Banks hold those balances at the Fed, and the interest rate paid on reserve balances, known as IORB, provides a key reference point for overnight funding markets.

The Fed’s latest monetary-policy implementation note set IORB at 3.90% effective September 17. It also directed the New York Fed’s Open Market Trading Desk to conduct standing overnight repo operations at 4.00%, the top of the FOMC’s new target range, and overnight reverse repo operations at 3.75%, the bottom of that range.

Those rates perform different functions. IORB gives banks an administered return on reserve balances and helps anchor overnight rates. The overnight reverse repo facility extends a similar floor mechanism to eligible counterparties that generally cannot earn IORB, including many money market funds. Standing repo operations work from the other side by offering eligible counterparties a source of cash against high-quality collateral when private repo rates come under upward pressure.

New York Fed officials have repeatedly described the standing repo facility as a backstop rather than a tool that must be used heavily every day. When reserves are ample and markets are functioning normally, private funding can occur without large Fed operations. If rates rise enough to make the facility economically attractive, its availability can help limit temporary upward pressure and reinforce control over the federal funds rate.

That distinction matters because the federal funds target range itself is a policy choice, while the operating tools are intended to make the chosen range effective in markets. Williams did not use Tuesday’s remarks to signal the likely direction of the next FOMC rate decision.

Maintaining ample reserves does not mean fixing one reserve level

The word “ample” describes a range rather than a single dollar amount. In that range, the federal funds rate should be only modestly sensitive to normal changes in the supply of reserves. If reserves become too scarce, short-term rates can become more sensitive to shifts in liquidity and the Fed may need to manage reserve supply more actively.

The current system reached an important transition late last year. After shrinking its securities holdings for more than three years, the FOMC ended aggregate balance-sheet runoff effective December 1, 2025. In December, it judged that reserves had moved into the ample range and instructed the New York Fed to begin reserve management purchases of Treasury bills, with shorter-dated Treasury coupon securities available if needed.

Those purchases are designed to maintain the quantity of reserves needed for efficient policy implementation. They are not intended to provide the broad easing of financial conditions associated with large-scale asset-purchase programs used during crises or periods of unusually weak economic activity.

The Desk initially planned about $40 billion of reserve management purchases a month, in part to prepare for the seasonal reserve drain associated with April tax payments. It later reduced the pace to $25 billion and then $10 billion as conditions changed. For the current September 15 to October 14 operating period, the Desk has planned no reserve management purchases, while continuing approximately $15.6 billion of purchases tied to reinvestment of principal payments from agency securities.

The ability to vary those amounts is part of the framework Williams defended. Reserve supply moves for reasons that have little to do with a change in monetary-policy stance, including shifts in the Treasury General Account, currency demand and other Federal Reserve liabilities. Bank demand for reserves can also change because of regulation, payment practices, financial innovation or shifts in liquidity preferences.

Williams says the framework must evolve with markets

Williams’s endorsement of the ample-reserves system was not an argument for freezing its current design. In his prepared remarks, as reported by Reuters, he said changes in financial-market structure should be matched by changes in how monetary policy is carried out when needed. He also argued that holding reserves at the central bank should involve little or no opportunity cost, because imposing a large cost can create inefficiencies and distort market behavior.

That point helps explain the role of IORB in the present framework. By paying interest on reserves at a rate close to overnight market rates, the Fed reduces the incentive for banks to aggressively shed reserve balances simply because holding them is costly. The result is a system in which banks can maintain substantial liquidity buffers while the central bank still controls the policy rate through administered rates and standing facilities.

Flexibility becomes especially important because the demand for reserves is not directly observable and can change over time. New York Fed staff monitor the federal funds market, repo rates, payments activity, usage of standing facilities and surveys of banks and dealers to judge whether reserves remain ample. Temporary volatility around tax dates, Treasury settlements or reporting periods does not by itself mean the system has moved into scarcity.

The Desk’s experience this year illustrates that approach. Reserve management purchases were front-loaded ahead of the April tax date and then reduced as the expected pressure passed. In July, New York Fed officials said money markets had continued to function well and rate volatility around the tax period had been modest and temporary. The Desk has since paused new reserve management purchases for the current monthly operating period while leaving the framework in place.

Williams’s central message was therefore narrower than a debate over whether the Fed’s balance sheet should be larger or smaller in absolute terms. The operational goal is to supply enough reserves for reliable rate control without treating a particular balance-sheet size as permanent. If underlying reserve demand falls because regulation or market structure changes, the Fed can allow reserve supply to adjust over time. If demand rises, the framework is designed to accommodate that as well.

The next scheduled FOMC meeting is October 27 and 28. Any decision on the policy rate will be separate from the technical work of maintaining ample reserves, although the same operating toolkit would be used to implement whatever target range the Committee chooses.