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Credit and Liquidity Programs and the Balance Sheet
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. 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 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.
Related
Federal Reserve Bank of New YorkOMOs can be divided into two types: permanent and temporary. Permanent OMOs are generally 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. Permanent OMOs involve outright purchases or sales of securities for the System Open Market Account, the Federal Reserve's portfolio. 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 to a collateralized loan, in which the difference between the purchase and sale prices reflects interest.
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.
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. Specifically, 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 mortgage-backed securities (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 consist of a purchase of securities combined with an agreement to sell securities in the future and provide short-term financing to the mortgage-backed securities market. Because of principal and interest payments and occasional delays of 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. Table 3 provides more detail; it also reports the Federal Reserve's commitments to purchase and sell these securities, along with information related to cash and cash equivalents associated with the purchase program. As noted in that table, the commitments to purchase and sell securities are associated both with outright transactions and with dollar rolls.
The FRBNY reports each week's purchases and sales of MBS on their website, while agency debt purchases are reported with the standard reporting of permanent 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. Over time, as the principal balance of the underlying securities decreases because the mortgages backing the securities are paid down or refinanced, the face value will decrease.
