In 2008 the Fed changed how they implemented monetary policy. They changed from a "Limited Reserve Framework" to an "Ample Reserve Framework". Basically, starting in 2008 the Fed increased their liabilities (banks reserves balances at the Fed) by over 100 times by 2014. When they did this, reserves were no longer scarce (needed...limited) by the banks. Therefore, their normal go to policy tool would no longer work to change their policy rate/benchmark rate (the federal funds rate). What was their #1 policy tool under a limited reserve framework? Open Market Operations (i.e. asset purchases and sales). This tool no longer worked because the point of this tool is to change the reserve balances of banks; but now, reserves were ample (additional reserves were no longer needed to carry out their daily activities). With a banking system awash with reserves (cash deposits), the Fed had to change the way they implemented monetary policy (i.e., changed their policy rate). Their new way to change the Federal Funds Rate (and really all short-term interest rates) was to change their administered rates (the IORB and the ON RRP).
This video is made for 1st year college students or AP/IB Economics students. It focuses on foundational economic concepts.
