From Floors to Flexibility

A Conversation on the Rise of Demand-Driven Central Bank Operating Systems

This week I participated in the Atlanta Federal Reserve’s 2025 Financial Markets Conference. The event featured panel discussions on a number of topics including the rising prominence of nonbank financial intermediaries, the shifting dynamics of bank funding, the impact of QE on bond markets and more. This was my first visit to this annual symposium and I thoroughly enjoyed it.

My role at the conference was to lead a panel discussion on the future of central bank operating frameworks. The panel included Claudio Borio, former head of the Monetary and Economic Department at the Bank for International Settlements, who has contributed extensively to the literature on central bank operating systems. Joining him was Imène Rahmouni-Rousseau, Director General of Market Operations at the European Central Bank (ECB). Completing our panel was Patricia Zobel of Guggenheim Partners Investment Management, who formerly served as deputy manager and manager pro tem for the Federal Reserve's System Open Market Account bond portfolio.

Our panel looked at the growing interest in demand-driven central bank operating systems and what implications, if any, they have for the Fed. My opening remarks and the panel video are posted below. I am also including an excerpt from the Reserve Bank of Australia (RBA) announcement that I mentioned in my speech since conference participants asked me about it.

My Opening Remarks

Good afternoon, and welcome to Policy Session 4 on central bank operational frameworks. I am David Beckworth of the Mercatus Center, and I have the privilege of moderating what promises to be a fascinating panel on recent developments in central bank operating systems.

Here in the United States, the debate around the Fed’s operating system has centered on the pros and cons of the floor versus corridor systems or, alternatively stated, the ample versus scarce reserve operating systems. These discussions have focused on the implications for interest rate control, market functioning, fiscal costs, and the size of the central bank balance sheet.

Internationally, though, a third path is emerging. A growing group of central banks is charting a new course toward what can be broadly described as demand-driven operating systems.

Three key central banks—the Bank of England, the European Central Bank, and the Reserve Bank of Australia—are leading this charge. They each use different names for their frameworks, but they share three essential characteristics:

First, the marginal unit of central bank liquidity comes from a standing repo or lending facility. Liquidity is demand-driven and therefore determined by the banks.

Second, the spread between the central bank’s lending rate and deposit rate is narrow, typically around 10 to 15 basis points.

Third, the targeted overnight rate is effectively anchored by the lending or repo facility rate

This represents a fundamental rethinking of how central banks supply reserves.

In a supply-driven system like a traditional floor or ample reserve system, the central bank preemptively injects reserves into the banking system—often in large quantities—to ensure that banks are fully satiated with liquidity.

In a demand-driven system, by contrast, the central bank does not guess or target a fixed reserve quantity. Instead, it stands ready to supply reserves in response to bank demand, typically via repo or lending operations.

Put differently, in the supply-driven operating system liquidity is explicitly ample. In a demand-driven system liquidity is latently ample—it’s there for the taking!

Although none of the central banks now pursuing demand-driven systems would use this term, one can think of this approach in the limit as being a demand-driven ceiling system.

Now, no central bank has reached a true demand-driven ceiling system, but the Reserve Bank of Australia has given us a glimpse of what the journey to this destination will look like. On April 2^nd, they announced they would no longer be reporting the interest rate on the settlement balances or, as we say here in the US, reserves. Going forward the OMO repo rate—their lending facility rate—will effectively now anchor their target policy rate—the cash rate. This would be akin to Fed no longer publishing the interest rate on reserves and turning to the Discount Window or Standing Repo Facility rate as the anchor rate for the overnight market rates.

So, it is quite remarkable that we are seeing these and other central banks begin a journey from supply-driven operating systems to demand-driven operating systems.

This development raises lots of interesting questions such as

· Why is this development happening now? Why after most CBs turned to ample reserve or floor systems during and after the Great Financial Crisis are we now seeing a turn to something very different?

· Also, is this development the beginning of a bigger trend, akin to the adoption of inflation targeting in the 1990s by some of the same central banks?

· Additionally, how is this playing out at the biggest of the central banks on this transformational journey, the ECB?

· Finally, what does this mean for the Federal Reserve System? What if at some point in the future, Fed officials decided they also wanted to explore a demand-driven approach to their operating system? How could they do it? Is it even possible, given the stigma challenges at the Discount Window and the limited participation in the Standing Repo Facility?

We have three great panelists to help us think through these and other questions…

Panel Session Video

The April 2nd RBA Announcement

In my opening remarks I mentioned the RBA was no longer reporting the interest rate on exchange settlement (ES) balances (i.e. reserves). I do want to clarify exactly what the RBA announced on April 2. The announcement came via a speech by Assistant Governor Christopher Kent. Here is the relevant passage:

Governor Kent notes that the RBA started announcing the ES rate once they moved to an excess reserves or floor system. The RBA’s targeted policy rate—the cash rate—was “anchored to the ES rate.” However, now that the RBA is moving to a demand-driven operating system, the “ES rate will be less significant as an anchor.” As a result, the RBA “will announce the cash rate target in its decisions but not the ES rate.” So the RBA is abandoning the ES rate in terms of framing its monetary policy decisions. As I noted in my remarks, the OMO repo rate will effectively replace the ES rate as the anchor for the targeted cash rate as the continue to develop their demand-driven operating system.

However, the ES rate still exists and technical changes to it may occur from time-to-time. Governor Kent made this clear in the speech and was asked during the Q&A after his speech about this point:

For more information on the thinking behind the push toward demand-driven operating systems, see this earlier post of mine.