By Michael S. Derby
NEW YORK, July 9 (Reuters) – The official responsible for implementing monetary policy at the New York Federal Reserve reiterated on Thursday that Treasury bill-buying aimed at managing market liquidity levels can go up or down as needed.
So-called reserve management purchases, or RMPs, “are not on a preset course, and the Desk can adjust amounts up or down for any given month, depending on money market conditions,” Roberto Perli, who manages the central bank’s System Open Market Account, said at his conference hosted by his regional Fed bank.
He noted that the interest-rate-setting Federal Open Market Committee at its mid-June gathering made “explicit that temporary pauses in RMPs could occur if money market conditions warrant,” adding “that represents flexibility that the Desk could use in the future, for example if money market conditions eased again substantially.”
The Fed started its RMPs in December to help build short-term market liquidity ahead of the mid-April tax deadline, which can cause notable volatility in banking sector reserves. The purchases of Treasury bills started off at a pace of $40 billion per month and have since moderated to $10 billion per month, and market participants are unsure what lies ahead.
Perli noted that the Treasury bill-buying helped the Fed navigate tax season and maintain firm control of interest rates. He noted that amid recent softness in money markets owing in part to Treasury cash management, there was “no evidence of a material change in banks’ demand for reserves.”
He said that the reserves situation is fixing to change. “This month and next, money markets will have to absorb a large amount of net bill issuance; as such, money market conditions may tighten, and the reserves demand curve could shift back up.”
Perli’s comments suggest the Fed may need to increase future reserve management buying.
He also said in his remarks that amid a review of how the U.S. central bank manages its balance sheet under new Fed Chairman Kevin Warsh, his department is ready to act.
“The Desk is well positioned to implement any changes to the balance sheet and rate control framework that the Committee might decide to pursue,” Perli said.
Perli also said he’s seen “encouraging signs” market participants are more willing to use standing repo operations when needed, while adding that headwinds to using the lending tool still exist.
Centrally clearing these operations would make the standing repos less costly to use for market participants, and “strictly from a monetary policy implementation perspective, there are likely benefits from offering a centrally cleared version” of the standing repos, Perli said.
(Reporting by Michael S. Derby; Editing by Paul Simao)
