The cap-based program to normalize the balance sheet...is the mechanism by which the decline in the balance sheet is kept to a gradual and predictable pace.But I'm wondering why this matters. The concern seems to be that if reserves fell by a large amount in a given month, this could be disruptive. Consider this though. Here's the Treasury's general account with the Fed:
...a shift in flows in the Treasury market had the effect of pushing both Treasury bill yields and repo rates higher in February and March. Figure 6 shows cumulative net Treasury bill issuance since the beginning of last year, as well as projections through the third quarter of this year as reported by a private-sector forecaster. The substantial run-up in net bill issuance over the past few quarters, along with other factors, contributed to notable growth in securities dealers’ inventory of Treasury securities, shown in Figure 7—inventories that likely required financing in the repo market.Here's Figure 6, so you can see what he's referring to:
The target range is an important feature of the FOMC’s public communications, and maintaining federal funds rates within it is therefore taken quite seriously. Public confidence in our ability to maintain rates within the target range is important for ensuring that expectations for the FOMC’s future policy stance are properly incorporated into the term structure of interest rates, and thereby appropriately affect financial conditions and the broader economy.For me, the public confidence issue of whether the fed funds rate might exceed the top of the range by a few basis points is a minor one compared to what I've been discussing. No one in the Fed System, including the guy who implements monetary policy, can give a convincing story about why the whole target range approach still makes any sense, why the ON-RRP facility is now irrelevant, and why IOER, overnight repo rates, and the fed funds rate are now about the same. I'm feeling somewhat underconfident, and look forward to being enlightened.