Effects of Changing Monetary and Regulatory Policy on Money Markets

The global financial crisis and the resulting policy response led to substantial changes in U.S. dollar funding markets, which are crucial for the functioning of the financial system and the transmission of monetary policy in the United States. We develop and test hypotheses on the effects of changing monetary and regulatory policy on key funding rates. We show that the federal funds rate continued to provide an anchor for unsecured rates, albeit weaker, while its transmission to the secured repo rate is hampered in the post-crisis period. The Federal Reserve's reverse repurchase facility led to stronger co-movement and reduced volatility of money market rates. The new regulations and the superabundant reserves environment affected rate dynamics on calendar days primarily through increased balance sheet costs.