New York Fed has bought no Treasury bills for reserves since mid-August, Perli says, and money markets are calm

The Federal Reserve has set its "reserve management purchases" of Treasury bills to zero since mid-August, Roberto Perli, who runs the Fed's securities portfolio at the New York Fed, said on Tuesday. In closing remarks at the U.S. Treasury Market Conference, he said the pause covered the past two purchase periods and that banks still hold enough reserves without the buying.

These purchases are not quantitative easing. The Fed started them last December to keep enough cash in the banking system so that overnight rates stay near its target, not to push down long-term yields. Perli stressed they are "never on a preset course" and could restart.

Why the Fed stopped buying

Perli gave three reasons. Bank demand for reserves was little changed. The Fed's forecast of reserve supply rose because the Treasury now plans to hold less cash in its account at the Fed by the end of December than the Fed had assumed, which leaves more money in the banking system. And money markets showed no strain.

The detail that stands out: in the weeks before the August decision, net Treasury bill issuance totaled about $400 billion, and repo rates rose only slightly. Late last year, he noted, repo rates rose substantially and were quite sensitive to new bill supply, and that pressure spilled into the federal funds rate.

The numbers behind "ample"

The Fed's own data backs him up. After last week's rate hike, the Fed pays 3.90% on bank reserves, according to its implementation note. On September 21, the effective federal funds rate was 3.88% and the Secured Overnight Financing Rate (SOFR) was 3.85%, New York Fed data show. Both are trading slightly below the rate on reserves, which Perli said suggests reserves are in "the higher part of the ample range."

Who it matters for

This sounds like plumbing, but SOFR is the index behind a large share of floating-rate business debt, including many commercial real estate loans, equipment lines and corporate credit facilities. When the Fed raises rates, those borrowers expect to pay more. What they do not want is a funding squeeze on top of it, the kind that pushed repo rates up late last year. Perli's message is that the Fed sees no sign of that right now. It also means that, for now, the Fed is not adding bills to its balance sheet while it raises rates.

One caveat he spelled out: the Fed still reinvests principal from its mortgage-backed securities into Treasury bills every month, so it remains a buyer in the bill market even with these purchases at zero.

What to watch

Perli said the Fed will watch how markets handle "another round of significant net bill issuance" expected in October, will review a new survey of bank finance officers on reserve demand, and will look for any pressure in repo. The speech also compared the Fed's approach with the repo-led systems at the Bank of England and the ECB, and called neither one inherently superior. That topic ties into the balance-sheet debate we covered in our story on Jefferson and Williams at the same conference.

Sources: Federal Reserve Bank of New York; Federal Reserve Board; New York Fed reference rates; Seeking Alpha; Bloomberg. This is market information, not investment advice.