According to expectations from respondents in a Federal Reserve survey, the scale of Reserve Management Purchases (RMP) the Fed is likely to undertake over the next 12 months, as part of efforts to ease money market pressures, is projected to exceed $200 billion.
The Fed decided at its December 9-10 meeting to begin purchasing short-term U.S. Treasury bills (T-bills). Officials believe that the level of reserves in the financial system has declined to a point that is merely "ample," a condition reflected in rising short-term funding costs. Although bank reserve levels fluctuate over time, cash demand typically increases around month-end and quarter-end when tax payments and other settlement obligations come due.
The Fed stated in the minutes from its December FOMC meeting, released on Tuesday: "Although respondents' estimates of the expected purchase size varied considerably, on average, they anticipated net purchases of approximately $220 billion during the first 12 months after the program's initiation."
The Fed indicated it would initially purchase short-term Treasuries at a pace of about $40 billion per month, subsequently tapering the buying scale. To date, the Fed has purchased roughly $38 billion in T-bills this month and will conduct two more operations in January.
Fed policymakers emphasized that these purchases are solely a tool for managing reserves and are distinct from the central bank's broader monetary policy stance or efforts to stimulate the economy.
The latest Fed meeting minutes revealed that prior to this decision, some participants observed that money market rates had risen relative to the Fed's administered rates more rapidly than during the balance sheet reduction period of 2017-2019.
Due to signs of stress in the $12.6 trillion repurchase agreement (repo) market, the Fed halted the process of shrinking its asset holdings—known as quantitative tightening (QT)—earlier this month. Increased issuance of short-term Treasuries since the summer, combined with the ongoing QT, has been draining cash from money markets, depleting the Fed's primary liquidity tools and pushing up short-term rates.
A related concern is that insufficient liquidity could disrupt the critical "plumbing" of financial markets, impair the Fed's control over interest rate policy, and, in extreme scenarios, force market participants to unwind positions, thereby transmitting shocks to the broader U.S. Treasury market, which serves as the benchmark for global borrowing costs.
The December FOMC minutes also documented discussions among Fed officials on how to define and target an appropriate level of bank reserves in the system. Some participants noted that, given potential shifts in demand, a more attractive approach than targeting a specific reserve quantity would be to focus on the level of money market rates relative to the interest rate on reserve balances.
The Secured Overnight Financing Rate (SOFR), a key benchmark tied to the overnight funding market, was set at 3.77% on December 29, according to data released by the New York Fed on Tuesday, which is 12 basis points above the rate the Fed pays on reserve balances.
The minutes stated: "A few participants noted that if the definition of 'ample reserves' resulted in a supply of reserves that exceeded the level needed for the Committee to implement its policy framework, it might induce excessive risk-taking by highly leveraged investors."
Some Fed officials also suggested that a standing repo facility, acting as a liquidity backstop, could play a more active role in interest rate control and allow the Fed to maintain a smaller balance sheet on average. However, other officials indicated a preference for relying on Reserve Management Purchases (RMP).
Despite a recent increase in usage of the Fed's standing repo facility, market participants have shown resistance to officials' encouragement of greater utilization, partly due to the perceived stigma associated with borrowing directly from the central bank.
