Credit and Liquidity Programs and the Balance Sheet
- Federal Reserve liabilities
- Recent balance sheet trends
- Open market operations
- Central bank liquidity swaps
Open market operations
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 in the implementation of monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). OMOs are conducted by the Trading Desk at the Federal Reserve Bank of New York. 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.
The Federal Reserve Bank of New York publishes a detailed explanation of OMOs each year in its Annual Report.
- Factors Affecting Reserve Balances
- Federal Reserve Act: Section 14. Open Market Operations
The Federal Reserve's Asset Purchase Program
Speech by Vice Chair Janet L. Yellen, January 8, 2011
OMOs can be divided into two types: permanent and temporary. Permanent OMOs involve outright purchases or sales of securities for the System Open Market Account (SOMA), the Federal Reserve's portfolio. Traditionally, permanent OMOs are used to accommodate the longer-term factors driving the expansion of the Federal Reserve's balance sheet--primarily the trend growth of currency in circulation. During and after the financial crisis, permanent OMOs were used to adjust the Federal Reserve’s holdings of securities in order to put downward pressure on longer-term interest rates and to make financial conditions more accommodative. Currently, permanent OMOs are used to implement the FOMC’s policy of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities (MBS) in agency MBS and of rolling over maturing Treasury securities at auction.
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 or RRPs). 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 to a collateralized loan by the Federal Reserve, in which the difference between the purchase and sale prices reflects interest. Under a reverse repo, the Trading Desk sells a security under an agreement to repurchase that security in the future. A reverse repo is the economic equivalent of collateralized borrowing by the Federal Reserve. Overnight reverse repos are currently used as a tool to help keep the federal funds rate in the target range established by the FOMC.
The Federal Reserve Bank of New York publishes details on its website of all permanent and temporary operations.
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 Reserve Banks." The release separately reports securities held outright, repos, and reverse repos.
Before the global financial crisis, the Federal Reserve used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate--the interest rate at which depository institutions lend reserve balances to other depository institutions overnight--around the target established by the FOMC. The Federal Reserve's approach to the implementation of monetary policy has evolved considerably since the financial crisis, and particularly so since late 2008 when the FOMC established a near-zero target range for the federal funds rate.
Monetary Policy Normalization
During the policy normalization process that commenced in December 2015, the Federal Reserve will use overnight reverse repurchase agreements (ON RRPs)--a type of OMO--as a supplementary policy tool, as necessary, to help control the federal funds rate and keep it in the target range set by the FOMC.
For additional information, see: www.federalreserve.gov/monetarypolicy/policy-normalization.htm
Large-Scale Asset Purchase Programs
From the end of 2008 through October 2014, the Federal Reserve greatly expanded its holding of longer-term securities through open market purchases with the goal of putting downward pressure on longer-term interest rates and thus supporting economic activity and job creation by making financial conditions more accommodative.
- From December 2008 to August 2010, to help reduce the cost and increase the availability of credit for the purchase of houses, the Federal Reserve purchased $175 billion in direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition, from January 2009 to August 2010, the Federal Reserve purchased $1.25 trillion in MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Detailed transaction level information for the MBS purchase program is available at the link below.
- From March 2009 to October 2009, the Federal Reserve purchased $300 billion of longer-term Treasury securities to help improve conditions in private credit markets.
- From November 2010 to June 2011, the Federal Reserve further expanded its holdings by purchasing an additional $600 billion of longer-term Treasury securities.
- Starting in September 2012, the Federal Reserve further increased policy accommodation by purchasing additional MBS at a pace of $40 billion per month.
- Starting in January 2013, the Federal Reserve began purchasing longer-term Treasury securities at a pace of $45 billion per month, following the completion of the maturity extension program in December 2012.
- In December 2013, the Federal Reserve announced that it would modestly slow the pace of additional MBS and longer-term Treasury securities purchases and would likely further reduce the pace of asset purchases in measured steps if incoming information broadly shows ongoing improvement in labor market conditions and inflation moving back toward the FOMC's 2 percent longer-run objective. Over subsequent months, the FOMC further reduced the pace of asset purchases in measured steps, and concluded the purchases in October 2014.
Currently, the Federal Reserve also purchases MBS under a policy announced on September 21, 2011, in which principal payments from its holdings of agency debt and agency MBS are reinvested
in agency MBS.
The Federal Reserve's outright holdings of Treasury securities, agency securities, and agency MBS are reported in tables 1, 5, and 6 of the H.4.1 statistical release. Table 3 of the H.4.1 release provides more detail on MBS holdings, including the Federal Reserve's commitments to purchase and sell these securities, along with information related to cash and cash equivalents associated with the MBS purchase program.
The FRBNY reports each week's purchases and sales of MBS on their website, while purchases and sales of Treasury securities and agency debt are reported in its standard reporting of permanent open market operations. The value of MBS held outright presented on the H.4.1 statistical release may vary from the aggregate value of MBS purchased reported on FRBNY's website. The H.4.1 statistical release reports settled MBS transactions separately from commitments to purchase and sell MBS. By contrast, FRBNY's website reports only purchase or sale transactions each week and thus does not address the issues of settlement. Moreover, the current face value of MBS reported on the H.4.1 statistical release represents the remaining principal balance of the underlying securities as of the Wednesday prior to the release.
Maturity Extension Program
Between September 2011 and December 2012, the Federal Reserve used open market operations to extend the average maturity of its holdings of Treasury securities in order to put downward pressure on longer-term interest rates and to help make broader financial conditions more accommodative.
- On September 21, 2011, the FOMC announced that it would extend the average maturity of its holdings of Treasury securities--by purchasing $400 billion par of Treasury securities with remaining maturities of 6 years to 30 years and selling an equal par amount of Treasury securities with remaining maturities of 3 years or less--by the end of June 2012.
- On June 20, 2012, the FOMC announced that it would continue its maturity extension program through the end of 2012, resulting in the additional purchase, as well as the sale and redemption, of about $267 billion in Treasury securities.
Single-Tranche Term Repurchase Agreements
From March 2008 to December 2008, the Federal Reserve conducted a series of term (28-day) repurchase transactions to increase the availability of term financing, to alleviate the strains in the financial markets, and to support the flow of credit to U.S. households and businesses. Detailed transaction level information for this program is available at the link below.
The Federal Reserve Bank of New York operates a securities lending program to provide a temporary source of Treasury and agency securities to promote the smooth clearing of the Treasury and agency securities market. Securities loans are awarded to primary dealers based on a competitive auction for overnight loans against other Treasury securities as collateral. A description of the program is presented on the website of the Federal Reserve Bank of New York, as are the terms of the program and the securities lending operations that are conducted. Securities lent on an overnight basis through this facility are presented in table 1A of the H.4.1 statistical release.