FED: SOMA's Perli: Probably Won't Have To Wait Long For Asset Purchase Restart

Fed System Open Market Account (SOMA) manager Perli closed the US Treasury Market Conference Wednesday with a speech discussing recent money market developments and their role in convincing the Fed to end QT. He also signaled that reserve management purchases to meet increasing demand for Fed liabilities could begin soon.

• "Even as we hold the size of the SOMA portfolio constant, reserves balances will continue to decline as our non-reserve liabilities, such as currency, continue to expand with the growth of the economy. 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. 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."
• This is in line with MNI's recent reporting (MNI POLICY: Fed To Start Gradual Asset Purchases Within Months) and, increasingly, consensus.
• Perli notes re the decision to end QT that "Considered together, higher money market rates, increased SRF usage, and shifting reserve ampleness indicators are strong evidence that reserves are no longer abundant", though he says "the estimated elasticity of the demand curve for reserves has thus far remained stable."
• He's predictably vague on the future composition of the balance sheet, merely observing that the Fed's post-QT reinvestment strategy of rolling MBS into bills while reinvesting maturing Treasuries at auction "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."
• Like other Fed officials, Perli sees Standing Repo Facility usage as a good thing, and essential to supporting "effective implementation of monetary policy and smooth market functioning".  "It is desirable and fully expected that the SRF be used whenever it is economically sensible to do so. Our counterparties participated in large scale in the repo operations that the Federal Reserve offered in the past; if it makes economic sense, there is no reason why sizeable participation cannot take place now that repo operations are offered twice daily on a standing basis. Stable, efficient, and well-functioning repo markets are in everyone’s best interest and vital for ensuring rate control, and the SRF is a crucial tool in supporting those objectives."
• Though he also says "levered investors hold a growing portion of Treasury securities and are key participants in auctions. Some repo rate volatility is not problematic and is arguably beneficial for allowing markets to send signals on market conditions. However, if repo funding costs become too volatile and unpredictable, the likelihood of forced liquidations of repo-financed Treasury positions increases, and that would create instability in the Treasury cash market and related market segments."