MNI BRIEF: Fed Will Buy Assets Before Long - NY Fed's Perli

The Federal Reserve will return to buying assets to keep pace with demand for currency and other liabilities before too long, and policymakers will decide the ultimate composition of those purchases, Roberto Perli, manager of the System Open Market Account at the New York Fed, said Wednesday. 

"All else equal, demand for reserves is also likely to increase over time as the banking system expands. At some point, therefore, it will be appropriate to start increasing the size of the SOMA portfolio," he said in remarks prepared for a U.S. Treasury market conference hosted at the New York Fed. "The exact timing will depend on several factors, but, as President Williams said, given what we know today we probably won’t have to wait long."

Having determined reserves are just above ample, the FOMC announced it will end its QT program as of December 1. Recent rate pressures have seen some movement in measures of reserve ampleness. The share of repo transactions taking place at rates above IORB and the share of interbank payments settled late in the day have reached levels seen in late 2018 and 2019, he noted. The share of borrowing in the federal funds market by domestic banks has increased as well. The estimated elasticity of the demand curve for reserves has thus far remained stable but is set to increase, he said. (See: MNI POLICY: Fed To Start Gradual Asset Purchases Within Months)

Starting in December, the markets desk will roll over maturing Treasury securities at auction and reinvest principal payments from agency securities into Treasury bills through secondary market purchases, a strategy that will slowly shift the composition of the SOMA portfolio toward Treasuries and the maturity structure of its Treasury holdings closer to that of total outstanding Treasury debt, Perli said. The Fed's portfolio is significantly underweight bills and overweight long-term coupon securities relative to the Treasury universe.

"While this reinvestment strategy will move the SOMA portfolio toward a more proportionate composition, it does not preclude any future Committee decisions around the portfolio’s longer-run composition."