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Monthly Report on Credit and Liquidity Programs
and the Balance Sheet
| Overview | SOMA Portfolio | Liquidity Swaps |
System Open Market Account (SOMA) Portfolio
Recent Developments
- The SOMA portfolio expanded rapidly over recent weeks, reflecting Federal Reserve purchases of securities under the large-scale asset purchase programs (LSAPs) announced by the Federal Open Market Committee (FOMC).
- The FOMC has authorized purchases of up to $1.25 trillion of agency MBS and up to $200 billion of agency direct obligations by the end of this year.
- The FOMC has authorized purchases of up to $300 billion of Treasury securities by the autumn of this year.
- As of May 27, the Federal Reserve had settled purchases of about $125 billion in Treasury securities, $80 billion in agency debt, and $428 billion in agency-backed MBS as part of the FOMC's large-scale asset purchase programs. The settled purchases to date have increased the size of the SOMA portfolio to about twice the level prevailing in August of 2008.
- So far, about 80 percent of the Treasury purchases have been in the 2- to 10-year maturity range and 10 percent in maturities greater than 10 years. The remainder of the purchases has been in Treasury Inflation-Protected Securities (TIPS) and securities maturing in less than two years.
Table 2. System Open Market Account (SOMA) Holdings
As of May 27, 2009
| Security type |
Total par value ($ billions) |
|---|---|
| U.S. Treasury bills | 18 |
| U.S. Treasury notes and bonds | 534 |
| Treasury Inflation-Protected Securities1 | 43 |
| Federal agency securities2 | 80 |
| Mortgage-backed securities3 | 428 |
| Total SOMA holdings | 1,103 |
1. Does not reflect inflation compensation of about $5 billion. Return to table
2. Direct obligations of Fannie Mae, Freddie Mac, and Federal Home Loan Bank. Return to table
3. Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Current face value of the securities, which is the remaining principal balance of the underlying mortgages. Return to table
Background
Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve inthe implementation of monetary policy. Historically, the Federal Reserve has used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate around the target federal funds rate established by the FOMC. OMOs are conducted by the Trading Desk at the Federal Reserve Bank of New York (FRBNY) as agent for the FOMC. The range of securities that the Federal Reserve is authorized to purchase and sell is relatively limited. The authority to conduct OMOs is found in section 14 of the Federal Reserve Act.
OMOs can be divided into two types: permanent and temporary. Permanent OMOs are outright purchases or sales of securities for the System Open Market Account, the Federal Reserve's portfolio. Permanent OMOs are generally used to accommodate the longer-term factors driving the expansion of the Federal Reserve's balance sheet, principally the trend growth of currency in circulation. Temporary OMOs are typically used to address reserve needs that are deemed to be transitory in nature. These operations are either repurchase agreements (repos) or reverse repurchase agreements (reverse repos). Under a repo, the Trading Desk buys a security under an agreement to resell that security in the future. A repo is the economic equivalent of a collateralized loan, in which the difference between the purchase and sale prices reflects the interest on the loan.
Each OMO affects the Federal Reserve's balance sheet; the size and nature of the effect depends on the specifics of the operation. The Federal Reserve publishes its balance sheet each week in the H.4.1 statistical release, "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks." The release separately reports securities held outright, repos, and reverse repos.
The Federal Reserve's approach to the implementation of monetary policy has evolved considerably since 2007, and particularly so since late 2008. The FOMC has established a near-zero target range for the federal funds rate, implying that the very large volume of reserve balances provided through the various liquidity facilities is consistent with the FOMC's funds rate objectives. In addition, open market operations have provided increasing amounts of reserve balances. To help reduce the cost and increase the availability of credit for the purchase of houses, on November 25, 2008, the Federal Reserve announced that it would buy direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The Federal Reserve determined that supporting the mortgage-backed security "dollar roll" market promotes the goals of the mortgage-backed securities purchase program. Dollar roll transactions, which consist of a purchase of securities combined with an agreement to sell securities in the future, provide short-term financing to the mortgage-backed securities market. Because of principal and interest payments and occasional delays in the settlement of transactions, the Federal Reserve also has some uninvested cash associated with the mortgage-backed securities purchase program. The Federal Reserve's outright holdings of mortgage-backed securities are reported in tables 1, 3, 9, and 10 of the H.4.1 statistical release.
In March 2009, the FOMC announced that it would also purchase up to $300 billion of longer-term Treasury securities over the next 6 months to help improve conditions in private credit markets. The Federal Reserve has purchased a range of securities across the maturity spectrum, including TIPS. The bulk of purchases have been in intermediate maturities. The Federal Reserve conducts purchases through regular auctions, with the auction results posted to the FRBNY website at www.newyorkfed.org/markets/openmarket.html.
