Central bank preparedness for market-functioning asset purchases as a consideration for long-run balance sheet composition

Rochelle Edge and Dan Li

No 2025-077, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper proposes an approach to enhance the Federal Reserve's readiness to undertake market-functioning asset purchases during Treasury market disruptions. It notes that by tilting the SOMA Treasury portfolio toward bills rather than maintaining a maturity structure proportionate to that of outstanding Treasury debt—often viewed as the most neutral portfolio—the Fed can create a larger volume of reinvestments each month that can serve as a “war chest” for undertaking market-functioning asset purchases. This structure of the SOMA Treasury portfolio enables market-functioning asset purchases to be made without expanding the balance sheet or increasing reserves. This avoids the need for close monitoring of reserves when asset purchases are eventually unwound, while also allowing for a clearer differentiation between asset purchases undertaken to support market functioning and asset purchases undertaken to ease financial conditions. Under reasonable assumptions, bills portfolio shares r

Keywords: Bills-tilted portfolio; Financial stability; Central bank balance sheet; Treasury market functioning; Soma portfolio composition; Market-functioning asset purchases (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G01 G12 G18 H63 (search for similar items in EconPapers)
Pages: 32 p.
Date: 2025-09-05
New Economics Papers: this item is included in nep-acc and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-77

DOI: 10.17016/FEDS.2025.077

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