Laurence Bristow on What the Fed can Learn from the Reserve Bank of Australia

(upbeat music) - Welcome to MacRome Usings. For each week, we pull back the curtain and take a closer look at the most important MacRome economic issues of the past, present, and future. I am your host, David Beckworth, a Senior Research Fellow at the Merkettis Center at George Mason University. And I'm glad you decided to join us. (upbeat music) Our guest today is Lawrence Bristo. Laurie is a former staffer from the Reserve Bank of Australia or RBA for short, where he played a key role in the redesign of the RBA's monetary policy implementation system. Laurie joined the state to discuss the RBA, its new operating system, the broader push among many central banks toward a demand-driven operating system, and finally, its implications for the Fed's operating system here in the United States. Laurie, welcome to the show. - G'day, David. It's a pleasure to be here. - It's great to have someone here with an Australian accent. I think this is the first for us, but also someone who really knows central bank operating systems. I mean, you were in the inner sanctum. You were in the RBA helping redesign its implementation or operating system. So I'm really excited to talk about that in a bit. Before we do, though, tell the listeners about yourself, your career, how you got to this place. - Yes, thank you. Before we get started, I just want to say that the views I expressed today are my own and not representative of my employer, the Bank Policy Institute, or the Reserve Bank of Australia. So I got my undergraduate degree from the University of Queensland majoring in economics and finance. I think coming out of that degree, I was interested mainly in research and in monetary policy. So I went on to get a one-year master's degree again from the University of Queensland, after which I joined the Reserve Bank of Australia in February 2021. So the first team that I worked in at the Reserve Bank of Australia was in the Risk Management Department. That team is split into two. So in the side that I was in was the international side. And in that team, we managed the risk on our foreign reserves portfolio. So the Reserve Bank of Australia has about a $60 billion Australian dollar portfolio held across seven currencies, which it stands ready to use if there's any dislocation in currency markets or if it feels that the Australian dollar is trading a long way away from fundamentals. The other side of that risk management team is the domestic side. And it was a very exciting time to join the RBA in February 2021, because the RBA's balance sheet was expanding due to QE. We were giving out long-term loans to banks and taking collateral against that. And so the risk of the domestic side of the portfolio was a big topic of conversation. After my time there, I was rotated into the monetary policy implementation team, which was a fantastic time in Australia to be in that team. Because soon after I joined the monetary policy implementation team, we began a full-scale review of our monetary policy implementation framework. Since working at the RBA, I have recently come across to Washington, DC. I'm working for the Bank Policy Institute as a Vice President and Research Associate. I found out about the role through my boss, Bill Nelson, who I know is a friend of the show. Absolutely. And I was writing a working paper on reserve demand in Australia for which he provided a peer review. We got to talking, and he offered me the job to come across to Washington, DC, and I'm very excited to be here. Well, it's always great to have someone on the show who likes to nerd out about central bank operating systems. There aren't many of us, but those that are around, I'd love to have them on the show. And you bring, again, a unique perspective. You can tell us about the changes that are happening there, what it's like to actually do every view of an operating system. You're really anticipating the Fed will one day take on the process of doing their own review so far it has not happened. And we want to talk about this because I think it's very timely for the Federal Reserve. There's been a lot of conversations, a number of speeches, Governor Michelle Bowman had to talk about the Fed's balance sheet. She's the first Fed official in recent memory who has said, "I would like to go back to a scarce reserve system," which is pretty shocking out. She's probably a minority. However, Stephen Moran had a recent speech as well. He's a governor. And he talked a lot about the regulatory constraints on the Fed's balance sheet. In fact, he talked a lot about the points that your boss, Bill Nelson, has often echoed on this podcast. So there are two champions there, at least, wanting to reconsider. Lori Logan has also had several speeches. Of course, she supports the ample reserve system. But a lot of, I think, robust discussion going on about the Fed's operating system. So I think the time is ripe to maybe have a review. And we can learn from the RBA, from the Reserve Bank of Australia, so I'm excited to talk about it. So let's move to the RBA. And maybe before we get to the operating system, or what do you call the implementation system, maybe just tell listeners a little bit about the RBA. If they're not familiar, what do they do? How's it governed? What does it target those basics? Yeah, fantastic. So the RBA's inflation target is set out in a document called the statement on the conduct of monetary policy. And that document records a common understanding between the government and the monetary policy board on key aspects of monetary policy. So the RBA operates with a flexible inflation target, aiming to keep consumer price inflation between two to 3%. And the extra detail on that is that in the setting of monetary policy, the board aims for inflation to return to the midpoint of that target range. I think in terms of how the RBA is governed, it's changed quite recently because of the RBA review. So when I was there, we just had the monetary policy board and the payment system board. And coming out of the RBA review, one of the recommendations was to add in a governance board. And that governance board is responsible for RBA operations like banknote issuance and the RBA's provision of banking services to the federal government. The governance board was still something of a hypothetical entity when I was there. So I can't comment more on the inner workings of that. I think one thing to note that's interesting about the RBA's governance framework is that the RBA sits separately from the banking regulator in Australia. So there's some communication at the staff level between the RBA and the potential regulator. And the collaboration at the senior level happens through this coordinating body called the Council of Financial Regulators on which the RBA governor, as well as the chair of the Australian Financial Regulation Authority, sits and they communicate on matters relating to financial stability. - That is so interesting. So in Australia, the setup is such that monetary policy, the central bank is distinct from the main bank regulator, which is different than we have here in the US, right? The Fed has both responsibilities and an I daresay probably the most important of the federal bank regulators. And one reason given for that, that there's many, but one reason given for that is, well, how can the Fed implement the discount window if it doesn't have all the super advisory data? If it doesn't know what's going on in the banks, but here's an example where a central bank is able to function. I mean, you have your own version of the discount window, the lending facility at the RBA and they are able to do their job. I guess they talk to the bank regulator. So it is possible. I know there's other countries like that as well. - Yeah, that's correct. I think the discount window in particular is interesting. I think our version, there are two versions kind of in Australia. There's the overnight standing facility and there's what we call exceptional liquidity assistance. When banks access both of those facilities in the past, there has potentially been some stigma around accessing those facilities. And part of that stigma is born from this question about whether the RBA should notify the potential authority upon a bank drawing down and one of those loans. - That's interesting. - That's the case for the overnight standing facility. And then we collaborate quite closely with the potential regulator on any loans given through the exceptional liquidity assistance facility. - Okay. Well, that is really intriguing. And again, just another food for thought that you can have a central bank that is distinct from bank supervisory duties. And I'll just say one more thing about this before we move on. This has also become a political question in the US with the new administration. There's this push to kind of maybe move all the bank regulators into one place or to consolidate them. And some critics would say, you know, it's one thing to give the Fed budgetary independence as you know, the Fed funds itself through senior rich. It doesn't need to go to Congress for appropriations. And that's fine because we want them to be independent. But it's really reasonable to have bank regulatory duties also funded from that because, you know, every other bank regulator in the US government has to go to Congress is accountable to at least the budgetary appropriation process. And so there has been this question, this great area. But it's just fascinating to see we have a case, the RBA where they are distinct. And I know there's other countries that have done this as well. All right. So they have an inflation target arranged, now recently chatted with Rafael Bostic, Atlanta Fed president, and he actually someone who's championed for the Fed to have a rate. He'd have a small range. And I will get a number of countries. A lot of countries have like one to three percent. I do think a range would be useful. That's where I would land on this. I think it allows central banks to be flexible to supply shocks. I mean, in terms of trade shock in Australia, when you're a small hope in economy, I think it's important to have some flexibility like that. But great example of central banking proactiveness. I mean, you know, RBA is one of the first countries to adopt inflation targeting, right? The Alvant Guard, if I can call him, head of central banking. And now they're taking the initiative in terms of thinking through their operating system. I know the ECBs had a review. Bank of England had a review. But always exciting to see forward thinking, not just doing what you're doing because it works well enough. Well, maybe well enough is not optimal. Maybe we could have a better world. So it's great. And there are people at the Fed and Capitol Hill who are listening to the podcast. Listen closely what Laurie has to tell us about insights from Australia. In addition to his cool accent and stuff, one quick question about Australia. So you ever go to the outback and explore the animals and amazing things out there? I haven't personally been, it's one state that I haven't been to in Australia is an open territory, so I can't. Okay. I don't have any stories from the outback. Okay. Well, maybe that's a good thing. We don't want central bankers to adventure some. We want them, you know, to be very calm. And focused and maybe I'll travel there one day for you and I'll give a report back. Okay. Back to central banking though. So you've described the RBA now. Let's talk about the new implementation system. Walk us through the back story. Maybe it's the beginning. Why did they feel there was a need to have a review? This is of this central bank monetary policy implementation system. Yes. So one thing to note about the RBA's implementation system, it's different from the Fed in that Australia didn't experience really a recession during the GFC and as a result, they didn't conduct any quantitative easing during that period or at any point during the 2010. So as we were coming into the COVID pandemic, Australia was still operating in a scarce regime. In response to the COVID pandemic, we had a gamut of unconventional monetary policies that we implemented. So those included bond purchases for market functioning. It included bond purchases to support the three year yield curve target. We also did traditional QE where we just purchased a large number of bonds. I think importantly for the review of the framework, we also extended three year fixed rate loans to banks. Those are collateralized. And because we expanded the supply of reserves so much and the period of time for those loans was three years, as those loans were rolling off, we knew that the supply of reserves was going to decline and decline quite rapidly, even from a high level. And so it kind of naturally prompted this question of, prior to the pandemic, we had the scarce reserves regime. We've increased reserves by a lot, and we know that they're going to drain in three years' time. And do we want to go back to the old system of scarce reserves or do we want to keep reserves at a higher level on a more permanent basis? And I think that was a natural point which we asked the question of what should our framework be going forward? Well, tell us about the framework review, the operating systems, framework review, how long did it last, who was involved with it, what role did you play in it? So the framework review really started around the time that I joined the team in May of 2022. There was a lot of staff involved in it at the RBA, all the way from the analyst level to the governor. We had a series of presentations to staff to inform them about the monetary policy implementation system and the challenge that we were facing. I think one thing that maybe is true of other central banks as well is that the level of education about the nuts and bolts of central banking tends to be quite low. And so part of that process was educating staff on what the key issues were and having them weigh in. We also briefed the board. I briefed the board on the state of demand for reserves at a certain point. And then really the review came in two stages. So the first stage of the review was deciding what operating system do we want. Do we want a scarce reserve system? Do we want a demand-driven system? Do we want to stay in a floor system? And once we had decided to switch to a demand-driven system, there was then an extensive process of exactly what the details of that system were going to be. What is the price of our ceiling system going to be? What is the price of our ceiling facility going to be? What is the tenor of operations that we want to offer? How frequently do we want to offer our open market operations? All of those kind of nitty-gritty questions were part of the second stage of that review. And we presented to the board for decision at both stages. So how long in total of the review take? So we started in 2022, the first stage of deciding what system, it was announced by our assistant governor in April of 2024, and then the second stage of the review took a year from April 2024 until April 2025. Yes, I remember reading this in the news this year, April 2025. And it was really interesting because I forget which official was it made this speech and announced. But he said among other things that they would no longer be reporting the settlement balance rate. It's still there, but where it used to be kind of like the anchor rate when they had this, you know, the QE, the Apple Reserve system, it no longer was going to be important moving forward, even though it's there in terms of anchoring that cash rate. The ceiling facility would be much more of the anchor moving forward, which is, I was like, wow, that's remarkable, that's amazing. So it took several years, it's a deliberate drawn out process. And again, federal officials, if you're listening, let's do this here. Maybe help us understand better this notion of a demand-driven operating system, because the RBA, I think the RBA is probably the one farther so long on this journey to be having that. And this is a journey to be clear, right? It's not like overnight, you can suddenly turn on the dime and stop and do it. You actually have to get there to shrink the balance sheet, implement these new tools, refine the existing ones, and such. But the ECB has also talked about demand-driven system. Now, there's a little harder to understand, because they've talked about a demand-driven floor system, which I think is a little bit of contradiction in terms, although I know why they say that. And Bank of England is also a demand-driven approach, but they're all getting there on a journey. So help us understand what is a demand-driven system. So I think officially the RBA is calling it a demand-driven system with full-elotment open-market operations. I think the way that I like to think about it is it's a ceiling system with a roof on top. So in the past, in the corridor system, the RBA controlled the quantity of reserves and let the market set the price. That price that the RBA targets is the cash rate. And what they're doing in the current system is they're controlling the price and letting banks determine the quantity of reserves that they want to source from the ceiling system. So another way to think about it is that the RBA is willing to lend theoretically an unlimited amount at a fixed price to its counterparties to put a ceiling on money market rates. Now the trick here is that the RBA's open market operations are only offered once a week on a Wednesday. And so there are four days in the business week where this facility isn't available to put a ceiling on rates. So you could imagine that collectively banks decide to borrow a certain amount from open market operations on a Wednesday. And then let's say on that Friday, there is a big tax take and the supply of reserves drops in a way that banks didn't expect when they made their decision to borrow from open market operations. That could cause some volatility in money market rates. And it could even cause money market rates to go above the rate on the RBA's ceiling facility. And that's where this kind of roof on top concept comes in. That's where we have the overnight standing facility. So the overnight standing facility is priced above the rate on open market operations. And it offers overnight funding for banks who need it in this kind of interim period between Wednesdays. And that's kind of the ultimate ceiling on the system and stops money market rates from becoming too volatile. So you have to have some robust ceiling facilities and you have your regular one, then you get one above that. If there's stress in the markets or heightened demand, maybe it's a better term stress, maybe too strong. Which is interesting. I think one of the things that is fantastic about the RBA's system is the lack of stigma at both of these facilities. So one of the things that the RBA, maybe it's luck, but maybe intelligent design is when we are in the floor system, after all of the unconventional monetary policies, we never stopped doing open market operations. So we never had to reintroduce a new facility when we were transitioning back to a demand driven system. The RBA kept offering its open market operations even when the supply of reserves was extremely high. And I think one of the reasons they did that was they wanted banks to continue to regularly borrow from that facility and to maintain a kind of lack of stigma in that facility. Now it's true that the overnight standing facility hasn't been used in the same way. And historically there's been some stigma attached to borrowing there, but one of the things that the RBA has done as part of its announcement of its new system is it's released a joint statement with the Australian Prudential Regulatory Authority that says we want banks to use the overnight standing facility in the regular course of business. And we won't kind of think badly of banks for doing that because it's important for the RBA's control over monetary policy. So interesting, a few observations here. One, I like how you frame this, so basically this is a demand-driven ceiling system. That to me is, that's the nice language it encapsulates, demand-driven ceiling system, but with the roof. Which is an interesting kind of like contrast to the floor system, but guess what, it's a leaky floor. So there's at least in the US, a leaky floor system, so we had to have the overnight reverse repo kind of. So it's kind of like the same idea, but on the very top. So on the bottom, we had a floor, we had the administered deposit rate, the central bank in the US. And it's an interesting reserve, it'd be the settlement rate, I guess, and the RBA. In the US, it proved leaky, or it would slip through that floor, and so you had to put something to catch it, and now we have something on the top. So we want to have a robust core, I mean, it's not a corridor system, but a robust, interesting corridor at the top, at the bottom. So that's kind of cool to have the flip of a leaky floor, just in case you want to have a robust roof on top of it. But demand-driven ceiling system, so I've become enamored with this. I've had several posts on my substock, and listeners go check them out if you haven't already. And so here's a couple of ways I've thought about this, I want to get your response. So you know advocates of the floor system say, "Look, one of the most beautiful things about the floor system or the ample reserve system is that there's ample liquidity." Governor Waller says, "Why would you want a system where banks have to go look in their cushions for spare cash?" Or, you know, like the idea of being trying hard to find some liquidity, and you don't have enough, so you're looking in all places, and that's how he describes scarce reserves. As opposed to ample liquidity in a floor system or ample reserve system, and to me, I think you can answer that question with the ceiling system. I would say a ceiling system has latently ample liquidity. If a bank needs it, they have no fear of going to the facility, whether it's lending or repo facilities, they say, "Look, I want it," and as you said, there's not the stigma there. It's a normal part of business, and so whether you have, you know, in the floor system explicitly ample liquidity, or in a ceiling system, you've got latently ample liquidity. I mean, you get it both ways. I think the cost for the ceiling system are far less than some of the costs with a floor or ample reserve system. Any thoughts? I think it's a great point. I think one of the advantages of the ceiling system is that, so there's this trade-off that exists between banks having a lot of cash, and them having the incentive to lend that in private markets. I think the thing that's nice about the ceiling system is that banks know they can borrow from the reserve bank at their ceiling system if they need liquidity, and that if it's priced appropriately, means that banks generally have enough cash to operate. But one of the things that's unique about the design of a lot of these ceiling systems is that the facility they offer is only once a week. And so in that intervening period, even if system liquidity is ample, there can be some volatility, and I think that volatility is important for kind of inducing the kind of private market activity that is valuable. Yeah, so you want some price discovery. You want Marcus to do their thing, but you want to be there as the backstop should get too volatile. I mean, you want some volatility, not too much volatility yet, so fascinating. Yeah, and again, and I like this term, and I coined it when I was thinking about this initially, and Bill Nelson was here, and we were talking about the changes at the ECB and the Bank of England at the time, and then RBA, but to me, it's latently ample liquidity in a ceiling system. And even some of the proposals here in the U.S. for like beefing up the discount window or better use of Senate repo facility, the idea is, for example, to use your collateral at the discount window to count towards say, look, liquidity coverage ratio, or some other regulatory thing. In other words, you don't have to have electronic money on your books, but you know you have it implicitly latently at the Fed. If you need it, you can, and now, of course, the problem in the U.S. is there stigma, there's maybe these facilities aren't designed as efficiently as they are the RBA. But again, I challenge our listeners, don't get hung up on, oh, but we have explicitly ample liquidity. We don't need to go dig in the couch for change as a bank. You know what, we don't need to dig in the couch because we have a facility that gives us latent ample liquidity. But anyways, I belabor that point, but any of their thoughts on the RBA system, so you said you created a roof to create just enough volatility, so there's some price discovery. Let me ask this question. Does that suggest that there'll be some interbank overnight unsecured lending? Because that's basically dead in the U.S. The Fed funds market is a shell of its former self, GSEs and foreign banks, and one of the critiques is, why do we use it? In fact, the lower Loganists, so let's move on to a repo rate, and I understand people aren't as excited as she is about that. I understand her point because what is the Fed's funds rate? It's not really an informative price, but so is the RBA's pushed to have a little bit of volatility to make that interbank signal have some value? I think this is a great point to distinguish between the central banks that have announced that they'll be operating a demand-driven system. If you look at, for example, the Bank of England, they have a demand-driven system, but the price of their ceiling facility is equal to the rate that they pay on their reserve balances. And so what that means really is that they're in this kind of demand-driven floor system because the price or the opportunity cost of holding reserves is close to zero, and so there's no incentive for banks to lend out that cash or redistribute those reserves amongst themselves at the end of the day in the interbank market. I think the RBA is on the opposite end of the spectrum in that initially our price under the ceiling system was 15 basis points above the rate on reserve balances, and in April 2025 we increased that rate from 15 basis points above to 20. And so the opportunity cost of holding reserves in Australia is much higher than it is at the Bank of England, and I think that there are really two reasons that we did this. I think number one consideration for us was just the size of the balance sheet. So one thing that's interesting to note about Australia is that the size of the repo market is much smaller than potentially in other places. And so even when we were operating under the scarce reserve system and only injecting two to three billion dollars in reserves, the RBA was 30% of the repo market, which is quite a large footprint. And so you can imagine that under a system where you're going to be operating a larger balance sheet, the RBA could potentially be 50 or 60% of the repo market. And I think that was our sense when we were looking at demand, we were thinking our balance sheet, we might have to inject up to 200 billion dollars of reserves, and we want to be able to decrease the size of our balance sheet. The other option was to keep the size of our balance sheet large and use other asset purchases to keep reserves high, and that was just going to entail a lot of risk on the RBA's balance sheet, which was something we weren't comfortable with. I think you raise a great point about the interbank market. In Australia, in particular, it's very important because our target for monetary policy is the cash rate. The cash rate prior to the pandemic only had about four or five billion dollars worth of volume each day, and that volume dropped to zero on a lot of days when we were operating the floor system. And Australia doesn't currently have an alternative to switch to, so we don't have a benchmark rate that is so far. There is a beta rate that's being produced by the Australian Securities Exchange, which we're calling Sophia, but it's not live, it's not operational. So the RBA kind of, I think it needs to engender some volume in the cash market just to keep its benchmark rate for monetary policy robust. And I think that was one of the reasons why we chose to increase the price of our ceiling facility was to kind of induce more activity in that market and to allow banks to redistribute reserves amongst themselves at the end of the day, rather than supplying more liquidity. So big changes are happening at the RBA. Now, I mentioned earlier, this is a journey, so they finished the journey or they still on the journey. It's hard to say whether we're finished with the journey or still on the way. One thing to note is that in the corridor system prior to the pandemic, the cash rate target was set 25 basis points above. The interest on reserves, our ceiling system is currently at 20 basis points above the interest rate on reserve balances. And so we're very close to where we were prior to the pandemic in terms of the cost of reserves in the system. It's just that we're picking the price now, not the quantity. So I think we're probably done for now until we see the supply of reserves decline further as the banks bond purchases roll off. And I think the RBA will continue to reassess whether it's kind of hit its steady state in terms of the size of its balance sheet, the amount of private market activity it wants to see as well as its own footprint in financial markets. So, Laurie just alluded to another central bank who's doing a demand-driven system, although their spread is much smaller. And so it is interesting to see this general movement among many central banks. I think the ECB counts, the Bank of England, Bank of Canada, some extents, the RBA. Here's my question. How did this all start? It's almost like this movement is happening, right? I mean, it obviously has to be, well, QE, how do we deal with QE? But how do they all kind of land on a similar journey? Again, differences. But what do you think? Why did they all want to go to a demand-driven ceiling? I think the biggest motivation for switching to a demand-driven ceiling system is that during the country's experience with the floor system, they found out that the demand for reserves is highly uncertain. It's difficult to estimate. And you can run up against the steep part of the demand curve without knowing that it's going to happen. So I think when I was at the RBA, the story of the Fed in September 2019 was repeated often as a cautionary tale for other central banks. I think one of the important things to note in that discussion is that people were quite worried about the skewed distribution of reserves amongst banks. And I think that point is basically that even if you have a large buffer above demand, it still might be the case because the distribution of reserves is skewed that some banks need to borrow into bank markets to replenish their reserve levels. And when they try and do that, they're accessing a market that has largely withered as a result of a lack of activity. It takes banks and other market participants a while to reboot those systems to increase their credit limits with their counterparties, for example. And so even when the supply of reserves is above what you estimate, and maybe even at the top end of your range where you think the demand for reserves is, you can still get volatility in money market rates or spikes in money market rates, which means that you lose control of your monetary policy. And I think that was the story that we told ourselves was that we don't know where demand is, we think it's increased and we don't want to experience this volatility that the Fed experience in September of 2019. And so the demand driven system solves this problem to some extent because you allow banks to expand the supply of liquidity automatically when they need it. And I think that's the sense in which central banks have all decided to operate a demand driven system because I think this problem of estimating demand and demand shifting around over time is common to all of the jurisdictions. That is a profound point. The critique of the scarce reserve system given by proponents of ample reserves. You've got to forecast reserve demand every day. You've got to, you know, that's a top. And ample reserves got to, you know, you push the reserves out there and you're one and done kind of. But your point is actually, no, it's a lot more complicated because you don't know where that curve goes steep, right? You don't know where you flip back from ample reserve into scarce and every day you're like, are we there yet? So there is a huge amount of uncertainty, even in an ample reserve regime. Moreover, as Bill and others have noted, you can't just say inject a certain amount, say you inject, you know, 500 billion through QE and say the US. And oh, we're done because what happens is the reserve demand, the structural part of it grows over time. So you might be, you know, you might go beyond that 500 billion may not be enough at some point. They may only be enough to get you back into the scarce reserve. So your whole point is it's not so simple. Ample reserve system is not so simple as advocates make it out to be. Whereas ceiling demand, you let the banks figure it out for you. I think that's right. And in the corridor system, prior to COVID for Australia, there was, there's this argument that it was, you know, hard to operate. You had to forecast the supply of reserves every day. I think that is true. And sometimes we got it wrong and we would have to go in and inject more reserves in the afternoon. But you didn't really have to forecast demand because it was very stable. It didn't move around a lot. And you really would just aim for a constant level of reserves. Whereas in the floor system, as the level of reserves is declining, you have to forecast where demand is going to be, which is very hard. It's highly uncertain. And you also have to keep all of that infrastructure for forecasting the supply of reserves because you want to know if supply is going to dip close to your estimate for demand. So you're actually kind of doing twice the work you're forecasting where demand is your forecasting where suppliers and there's more uncertainty over demand in that system. Yeah. So that as the profound point again is in some ways, it's even harder ample reserve. The knowledge problem is sometimes even more pronounced. And this one last point, what you said about sometimes even in an ample reserve system reserves get concentrated in some banks while other banks need it. And you can have volatility. You can have problems. Whereas in a ceiling system, demand-driven, each bank knows what it needs. It goes to the facilities and it's satisfied. So on so many levels, it seems to me like, I don't say a slam dunk case, but man, and no brainer like demand-driven, it provides latent ample liquidity, banks know when they need to go. Now of course, the critics will say, well, there's the devil's in the details, David, because if you don't have good ceiling facilities, which is fair, then this is just a pipe dream. So maybe it is a slam dunk case on paper, David, but in reality, you're dreaming, man, that there's not going to happen. So I think there's one thing to note about the slam dunk case. And that's that you're kind of relying on each individual bank to borrow from your ceiling system. But you're also relying on banks collectively to borrow enough reserves. So because there's not so much experience with demand-driven systems in the current environment, there's this critique that, well, maybe there's a collective action problem, maybe banks expect to borrow from other banks instead of from the central bank. And so because of that, maybe there's not enough reserves in the system that banks collectively don't borrow enough for money market rates to trade around where you want. And that's one of the things that I think the RBA will be monitoring for as it transitions into its demand-driven system is just how well banks are going to forecast their needs, how well banks are going to forecast the supply of reserves in between open market operations dates, and how well they solve that collective action problem of who's going to borrow to increase the aggregate supply of reserves. But if there were a shortage of reserves, aggregate level, wouldn't by definition banks go to the facility to satisfy that? I mean, if race are starting to go up, if I'm a bank, and there's a shortage overall, well, yields are going to start to go up. So guess what? I'm going to go to the facility where they're cheaper. And so to me as like an automatic fix, am I missing something? It is in like a longer term sense, but you have to remember that the open market operations that Australia and other central banks are doing are only once a week. Okay. And so I think that's where there could be some sticking points. Is it because they forecast reserves within the week to be higher than they end up being or the realized number is that there's some intro kind of intro week volatility. And that's the thing that potentially is worrying. And that's why RBA has this roof to control that. And that's why this is still a journey. And that's why it's still a journey in a learning process. So we're still going to have to figure out how often should we engage in these operations? How big should it spread be? All these details need to be flushed out because we really don't have any data points. We have a great theory on paper that I'm terribly excited about. And I'm so delighted to see the RBA do this. All right. Let's take these ideas as awesome as they sound in me and apply them to the Federal Reserve. And I want to do that first by talking about a symposium that the BPI had a money market symposium or conference. You guys roll apart of it. And I understand these issues came up. These very issues came up. So tell us about that event. Yeah. So we had an event. There was a bunch of market participants, some Fed staffers, myself and Bill involved in the discussion. And I think the discussion was mainly around developments in money markets recently. And the Fed's kind of steady state implementation system and balance sheet. So the context for the discussion is that repo rates have recently risen above the interest rate on reserve balances. In some cases, there's been trading above the rate on the standing repo facility. And the question out there is, will the Fed increase the supply of reserves? Will it respond to this action? Will it begin reserve management purchases going forward? And there was a lot of discussion around the standing repo facility and how effective that tool has been in capping repo market rates in the current environment. Yeah. And so people acknowledge the problem though, right? And this is a great example. Right now, repo rates are above. You know, and guess what they aren't using the ceiling facilities like we would want them to so we don't have all of our ducks in a row. So to speak to even maybe be thinking about how the hand driven ceiling system. We would want to see something done with a discount window. Bill's had a lot of great suggestions. Again, I've championed Bill's views. He has suggested bringing back something like the term auction facility like tap. So you regularly auction. That's what the RBA does, right? You regularly this full allotment. You set the price and you can come get as much as you want. So maybe we do something like that. So it becomes normal operating procedures. In fact, you know, during the great financial crisis when the Fed did it, banks took it up and it had a different name. It wasn't a discount window. Maybe that's part of it. Also, Bill and others have argued having collateralized lines of credit at the discount window. So you can tap into those, use those for liquidity requirements and just make it more normal to be using that. That would be the discount window sending repo facility. There's been proposals to have it open more often. I know they've made some changes recently. But also, there's been talk about bringing in central clearing to the standing repo facility. That way standing repo facility could have more counter parties, at least on the other side of that central clearing entity in the middle. Were these issues also discussed? Yeah, I think mostly related to the standing repo facility and less so around the discount window. I think the interesting things that we heard from market participants around the standing repo facility is that there is still some stigma surrounding borrowing from that facility. And I think that stigma kind of has two sources. One is that primary dealers don't want to explain to their CEO that they're borrowing from the Fed. And the other one that was mentioned in the symposium was that occasionally to spend get questions from their credit rating agency representatives about why they're borrowing from the Fed and why they aren't using other private market sources. I think that's the first time I've heard of that specific argument. But I think my takeaway from that discussion is that there is still stigma surrounding borrowing in the standing repo facility despite kind of record volumes in that facility in recent times. I think there were a number of suggestions offered by participants in the symposium to reduce stigma of the standing repo facility. The question that was mentioned is just to reduce the price to below the top of the target band to encourage usage by market participants. One solution that was offered also was just to recast, like you say, recast the language around the facility to say that it's for monetary policy implementation purposes and it's not a backstop on rates. Another kind of technical solution that was offered would be to move the auction that's in the morning to be even earlier could be closer to where a lot of the volume happens early in the day in the repo market so that participants can use it in their regular course of business rather than after most of their business has taken place. And one other solution to stigma at the standing repo facility that we heard would be to kind of separate participation between banks and primary dealers. I think it would be easier to explain taking funding from the standing repo facility for primary dealers if it was only primary dealers that were a part of the facility partly because it feels a lot more like go for market operations did back in the day and it's kind of borrowing the regular course of business. So one of the big issues that I see for making the standing repo facility more useful is the fact that the US financial system depends less on banks and say your European system is it's bank driven here. There's a lot of banks but there's also a lot of non bank financial firms credit creation going on and so you need other entities besides the banks to help intermediate what the Fed is doing when the Fed wants to inject liquidity. So to me it seems like it'd be especially important to bring in that central clearing because then it would allow you know I dare say hedge funds or other private credit creation entities out there that are playing a role. Maybe there are some concerns about them getting access to the Fed's balance sheet but the central clearing is one way to I think address that. But isn't that a big issue too is that the very structure of the US financial system is not just banks coming to the Fed it's you need these other financial intermediaries who also play a role. I think that's right and that was one of the solutions that was discussed in the money markets symposium. I think it's one of the things that was mentioned in the latest FOMC minutes as well was potentially opening up the standing repo facility to be centrally cleared. I think there was some discussion in the minutes about potentially increasing systemic risks surrounding the central counterparties as a result and having them more intimately connected to financial wiring and also increasing kind of Fed's footprint in financial markets through that. But I think that solution is less of an immediate term solution maybe more of a medium term solution yeah over the Fed because it would take some time to implement. So right here now we got people rates above target and so we need to do something about that but long term structurally it might be it might be fixed to do it. So all of this is an important and also interesting to people like you and me as I mentioned we like to nerd out on these issues but also there's politics there's personalities that play. And to me I was really surprised to see as I mentioned earlier on September 26th vice chair Michelle Bowman gave a speech where she literally said she would like to see her return to scarce reserve system and let me just read an excerpt from her talk. Why she would want to return to scarce reserve system and again I think she's maybe the only person explicitly saying this other than Steve Moran kind of hinted at this in his talk that he gave just recently. She goes first a smaller balance sheet would minimize the Fed's footprint and money markets and treasury markets second holding less than ample reserves return us to a place where we are actively managing our balance sheet. Identifying instead of making signals of market stress in my view act actively managing a balance sheet would give a more timely indication of stress and market functioning issues as allowing a modest amount of volatility and money markets can enhance our understanding of market clearing points which is what the RBA is striving for. They want a little bit of volatility so there's some price discovery some it needed maybe the red alert sign goes up but again I think the ceiling system would also be better I mean I guess what I'm saying is let's don't stop at scarce reserve let's go all the way to something like a demand driven ceiling system. I think it's an interesting point and maybe what you're touching on is is there a difference between a corridor system and a demand driven system at the same level of reserve so kind of what's better do we want scarce reserves with a corridor system or do we want a small number of reserves equally but control money market rates with the ceiling system. And I think if you're going to decrease the supply of reserves to similar to what they were in a scarce reserve system but you are going to operate ceiling facility I think the one change that you might have to make from something like what the RBA in the bank in England are doing is that you might have to operate your ceiling facility on a greater frequency so rather than once a week and allowing reserves to fluctuate through that week and create that volatility if you were going to operate with a very small number of reserves there would be. There would be some volatility kind of inherent in having the supply reserves quite small and that would be enough I think to induce some activity between banks and then you could offer that facility every day and then you would also see that activity in that facility would give you some indication of where the market clearing price is. Those are great points and food for thought in terms of if we ever do get to the ceiling system so Michelle Bowman vice chair Bowman gave this speech in September a little bit earlier in August President Lori Logan the Dallas Fed also gave a talk where she said look if you if you want to. Go smaller you're going to have to get those ceiling facilities working so she came up with a bunch of proposals for making a discount window sitting in a facility more robust on very sympathetic not to be clear president Logan later had a speech in October so after governor Bowman's but president Logan a speech titled ample liquidity for safe and efficient banking system where she rent. Four court press making the case to keep the ample reserve system and then just recently governor Stephen Moran on November 19 had a speech titled regulatory dominance the Federal Reserve's balance sheet and he made again a lot of the points that your colleague Bill Nelson has made about the regulatory issues on constraining the flexibility of the fed's balance sheet to adapt so any thoughts on governor Moran's speech. So I think the focus of governor Moran's speech yesterday was at the intersection of banking supervision and monetary policy implementation and maybe I can offer an anecdote from Australia as well okay I think a similar dynamic happened in Australia has happened here except in different context so when the supply of reserves was abundant in Australia. It was around the twenty twenty three crisis in the U.S. around SVB and one of the things that came to light was just how quick bank runs can be and how much potential liquidity banks need to kind of facilitate that I think one of the things that the Australian potential regulatory authority asked Australian banks to do was to kind of reconsider their monetization risk. Over a short period of their high quality liquid assets and I think what that did is it made banks really reconsider how many reserves they had to hold. And really what that is is supervises telling banks to hold reserves independent of decisions around the monetary policy implementation framework so I think he's kind of right in his characterization of the issue where supervisors are telling banks to hold reserves and. The central bank is least in Australia was it kind of late to that conversation yeah well maybe that's the argument for keeping supervision at the fed so they can have some control or say so and it will be interesting to see what vice chair Bowman's you know new push to downsize and reconfigure bank regulation I wonder if she's going to do anything about this issue to in order to help. Monetary policy implementation but with that our time is up our guest that he's been Lori Bristol Lori thank you so much for a fun conversation on central bank operating systems it's a pleasure David. Macrow museums is produced by the Mercatus center at George Mason University dive deeper into our research at mercatus dot org forward slash monetary policy. You can subscribe to the show on Apple podcasts spotify or your favorite podcast app if you like this podcast please consider giving us a rating and leaving a review this helps other thoughtful people like you find the show find me on Twitter at David Beckworth and follow the show at macro underscore musings.