A key Federal Reserve official on Monday made the case for the central bank’s program of buying only the shortest-dated Treasuries to ensure the banking system has enough reserves. But she signaled an openness to make changes if they’re needed to keep markets calm.
By confining itself to bills, the central bank can help maintain the supply of reserves while limiting the impact on financial conditions, said Lorie Logan, who oversees market operations at the Federal Reserve Bank of New York. She also noted that the market for bills is particularly deep and liquid, and that the Fed at present doesn’t own much in that part of the curve.
“So far, reserve management purchase operations have proceeded smoothly,” she said Monday in a speech in New York. But she also noted that the Fed “is prepared to adjust the pace and other parameters of the reserve management purchases as necessary” and that the Fed would be monitoring the market closely.
As part of its program to avoid a repeat of the funding-market stresses seen in September, the central bank is scooping up about $60 billion a month of Treasury bills -- securities that mature in a year or less that don’t provide any coupon payments. But there has been some speculation in the market about whether the central bank might need to buy longer-dated securities.
Before the 2008 financial crisis, the Fed’s Treasury holdings were almost entirely in bills. Now, it’s less than 3 per cent, Logan said, noting that that’s below their 15 per cent share of all Treasuries in circulation.
She also spoke about how the Fed determines the overall size of these reserve management purchases. The buying, over time, will replace the reserves that the Fed is currently supplying through its temporary repurchase-agreement operations. It will also support gradual increases in demand for the Fed’s non-reserve liabilities and absorb normal variability within those.
“In practice, this will mean looking out over several months and sizing reserve management purchases to offset expected reserve declines,” Logan said. “The amount and timing of the operations take into account market functioning considerations and allow for some adjustments around periods with sharp expected declines in reserves or liquidity conditions.”