The optimal monetary regime for the Federal Reserve is somewhere between a scarce and abundant level of reserves, argues Simon Potter and co-authors in new research. Potter is the former head of markets at the New York Fed.

At this level, the Fed could set a lower and upper threshold at which it would inject or drain liquidity, respectively, following shocks to the demand and supply of reserves, they say in the paper published by the Federal Reserve Bank of Atlanta.

The authors analyse the Fed