BNY Markets’ John Velis and David Tam discuss Federal Reserve reserve management purchases (RMPs), noting that new qualifying language suggests the Federal Open Market Committee (FOMC) is more comfortable with system reserves and may adjust RMPs more flexibly. They highlight that reduced RMPs have already calmed repo volatility, but caution that any pause could spur market speculation about an impending balance sheet runoff, requiring clear Fed communication.

RMPs signal evolving Fed stance

"The addition signals that the FOMC is now more comfortable with the aggregate level of reserves in the system and the added qualifier “when appropriate” suggests that continued purchases might not be necessary going forward."

"The additional language should also reinforce the idea that the Fed has broad latitude to change the size of RMPs on a month-to-month basis."

"A further reduction or full-blown halt in RMPs would be at the very least evidence that the Fed feels the quantity of reserves is sufficient to maintain the ample framework."

"If the Fed were to pause RMPs next month, we imagine that speculation that the Fed was commencing balance sheet runoff would take off, even if the Fed’s intentions in pausing RMPs were narrower."

"We would look to Fed communication or the work out of the balance sheet taskforce for clarity if and when the Fed pauses RMPs but are concerned that this might not be forthcoming by next month."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)