New York Federal Reserve official: U.S. Treasury purchases have no preset path, will closely monitor financing market pressures in October

According to Zhihui Finance APP, Roberto Perli, head of the New York Fed's Markets Group, stated that the Federal Reserve will continue to assess the level of reserves in the banking system, and that the purchases of U.S. Treasury securities for reserve management do not follow a preset path and may be adjusted in the future according to market conditions.

Perli, delivering prepared remarks at an event in New York on Tuesday, said that earlier this year, the Federal Open Market Committee (FOMC) gave the New York Fed’s Open Market Desk a certain degree of autonomy to adjust the scale of reserve management purchases as needed.

At present, the scale of such purchases is zero. Perli pointed out that previous adjustments were made in response to "evolving market conditions," and that if necessary in the future, the New York Fed is prepared to adjust again in order to implement the FOMC’s policy of maintaining banking system reserves at an “ample” level.

Perli stated that the New York Fed will closely monitor the views of senior financial officers at major financial institutions on market conditions, as well as other signs of stress in financing markets. He specifically noted that the market widely expects another round of large-scale net issuance of U.S. Treasuries in October, so the New York Fed will observe the market's reaction to this.

Earlier this month, Federal Reserve officials announced that no purchases of U.S. Treasuries for reserve management purposes would occur before mid-October, effectively extending the pause that began in August. However, the New York Fed said at that time that it still planned to reinvest about $1.56 billion. This means the suspension of reserve management purchases does not mean the Fed is completely stopping purchases in the U.S. Treasury market, as the two types of operations differ in purpose and nature.

Perli has previously stated that the scale of the Fed’s monthly purchases of U.S. Treasuries can be adjusted up or down depending on market conditions, and there is no fixed purchase path.

After ending the process of shrinking its balance sheet last year, commonly referred to as quantitative tightening, the Fed began implementing reserve management purchases to ensure the banking system has ample reserves and to maintain stable money market interest rates. Thus, these Treasury purchases are primarily a technical operation for managing the liquidity of the banking system, rather than a pre-set-sized and fixed-term new round of asset purchases.

One key focus of Perli’s latest speech was the soon-to-arrive supply of U.S. Treasuries. As the market expects a new, relatively large net issuance of Treasuries by the U.S. Treasury Department in October, the liquidity situation in the short-term funding market may face challenges. The New York Fed will pay close attention to whether the market can smoothly absorb the additional supply and whether there is stress in short-term funding markets such as repos.

If market conditions change, the Fed can accordingly adjust the scale of reserve management purchases to ensure reserves remain within the “ample” range required by the FOMC. This also means that, although reserve management purchase volumes have currently fallen to zero, whether purchases will resume in the future will depend on reserve levels and the functioning of money markets, rather than following a fixed timetable.

Beyond reserve management, Perli also discussed the importance of central clearing mechanisms in the repo market. He stated that central clearing of repo transactions brings multiple benefits. If the Fed’s operational framework relies more on repo tools in the future, these advantages will become even more important, as central clearing can enhance counterparties’ capacity to intermediate liquidity throughout the financial system.

Earlier the same day, New York Fed President Williams also said at the same conference that the transition of U.S. Treasuries and repo transactions collateralized by U.S. Treasuries to central clearing mechanisms is progressing faster than originally planned.