How is the daily reserve supply curve described in the U.S. federal funds market?

The daily reserve supply curve in the U.S. federal funds market is described as vertical until the federal funds rate meets the discount rate, and then it becomes horizontal. This reflects the behavior of the supply of reserves by banks.

When the federal funds rate is below the discount rate, banks are more willing to lend reserves to each other rather than borrowing from the Federal Reserve at the higher discount rate. As a result, the supply of reserves can be considered fixed, reflecting a vertical supply curve in this range. Banks have a certain quantity of reserves available to lend at this interest rate.

Once the federal funds rate reaches the discount rate, banks are indifferent between borrowing from the Fed or lending to other banks because they can obtain reserves at the discount rate if they choose. At this point, the supply curve becomes horizontal, indicating that banks are willing to supply an unlimited quantity of reserves at that rate because they would prefer not to borrow from the Fed unless absolutely necessary.

This behavior of the supply curve is crucial for understanding how the federal funds market operates, particularly how bank interactions can influence short-term interest rates.