Fed extends pause on reserve management purchases to October

NEW YORK: The Federal Reserve (Fed) says for the second straight month it won’t buy treasury bills for reserve management purposes in the upcoming period, an indication that policymakers are comfortable with the level of bank reserves in the financial system.

While the New York Fed’s open markets desk doesn’t plan on conducting reserve management purchases (RMPs) over the monthly period ending Oct 14, it still plans on buying about US$15.6bil in reinvestment purchases over the time, according to its website. 

The hiatus signals the Fed is confident in the smooth functioning of funding markets.

That’s borne out with the Secured Overnight Financing Rate, a benchmark rate based on the cost of borrowing against treasury securities, trading at or below the interest on reserve balances rate (IORB), for most of the past month, as well as the Treasury Department’s paydown of bill supply ahead of the quarterly tax deadline.

The change doesn’t signal any shift in monetary policy or balance-sheet strategy. 

Wall Street strategists from Wells Fargo and Bank of America expected reserve management plans to be on hiatus this month before resuming in mid-October in anticipation of pockets of pressure in the funding markets that are expected to surface when Treasury ramps up bill issuance beginning next month.

Barclays Plc strategist Samuel Earl sees purchases moving back up to US$10bil in October and US$20bil in November. 

Citigroup Inc strategists, however, see the Fed remaining on pause for the rest of the year, noting that bank reserve balances have already been pushed back to a “lightly abundant regime”. 

Bank reserves stood at US$3.04 trillion as of Sept 9. That was up from US$2.85 trillion at the end of last year and above the year-to-date average of US$3.01 trillion. 

The Fed abruptly stopped shrinking its balance sheet – a process known as quantitative tightening – at the end of 2025 and pivoted to adding reserves back into the financial system by buying short-term Treasuries due in less than a year.

In December, the central bank began buying about US$40bil of bills each month in a bid to ease the pressures that were building in short-term rates.

At that time, then-chair Jerome Powell said the Fed was “front-loading” its purchases to ensure there were enough reserves through the April tax season. 

The central bank sharply reduced RMPs to US$25bil in April, which was greater than anticipated as policymakers had conveyed that the decrease could be “somewhat gradual” to account for uncertainty and other factors.

It reduced them to US$10bil in May, another sharp pullback that surprised market participants, before halting them altogether in August. 

The Federal Open Market Committee in June changed its policy implementation note to make explicit that temporary pauses in RMPs could occur if money market conditions warrant, a reflection of the central bank’s flexibility when setting future purchase amounts. 

New York Fed’s Roberto Perli reiterated in July RMPs aren’t on a preset course, and the desk can adjust amounts up or down for any given month, depending on money market conditions, and they will continue to see the amounts with the aim of keeping reserves within the ample range. 

Funding conditions have been soft across the board during the past month as cash has overwhelmed available collateral: banks have been parking more money in short-term markets, and money-market fund assets have reached all-time highs.

That’s helped keep money market rates anchored even as the Treasury Department has been flooding the market with bill issuance. — Bloomberg