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

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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

Suggested Citation

  • Rochelle M. Edge & Dan Li, 2025. "Central bank preparedness for market-functioning asset purchases as a consideration for long-run balance sheet composition," Finance and Economics Discussion Series 2025-077, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2025-77
    DOI: 10.17016/FEDS.2025.077
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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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