FICC Focus Macro Matters: Ample Reserves and Fed Stigma With Darrell Duffie
Jan 15, 2026
Darrell Duffie, a Stanford professor and monetary policy expert, joins the conversation to dissect current Federal Reserve practices. He emphasizes the crucial link between reserves and the payment system, explaining why large reserves are now necessary. The talk dives into the Fed's shift to Treasury bills, the stigma surrounding its lending facilities, and how these factors can impact market liquidity. Duffie also previews his research on reserve levels affecting payment timings and potential solutions to reduce stigma in Federal funding.
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Reserves Drive Modern Policy Implementation
- The Fed now runs monetary policy implementation by ensuring enough reserves to operate the payment system rather than keeping reserves scarce.
- This requires a much larger balance sheet and makes reserve quantity the binding operational constraint for setting short-term rates.
Fed Tilts Toward Bills To Avoid Market Distortion
- The Fed is shifting assets toward Treasury bills and away from MBS to avoid interfering with bond markets and preserve independence.
- Liability-side needs (reserves) matter more than asset composition for operational policy going forward.
From Abundant To Barely Ample Sparks Intervention
- When reserves move from abundant to barely ample, funding stress appears and the Fed sometimes must change balance-sheet policy.
- Recent Fed action paused quantitative tightening and began buying bills to raise reserves above $3 trillion.