Fed's Perli reiterates flexible path of reserve management buying

• Reserve management purchases (RMPs) started in December at $40 billion per month and have moderated to $10 billion per month, with the FOMC explicitly allowing for temporary pauses if money market conditions warrant
• Perli indicated that upcoming heavy Treasury bill issuance in July and August may tighten money market conditions, suggesting the Fed may need to increase future reserve management buying
• The New York Fed's market operations desk is prepared to implement any balance sheet changes under new Fed Chairman Kevin Warsh's review of the central bank's balance sheet management framework

Summary

Key Development:

Roberto Perli, manager of the Federal Reserve's System Open Market Account at the New York Fed, confirmed that the Fed's reserve management purchases (RMPs) of Treasury bills will remain flexible and responsive to market conditions, with no preset course for buying activity.

Critical Details:

• RMPs began in December at $40 billion per month and have since decreased to $10 billion monthly
• The Federal Open Market Committee explicitly stated in its mid-June meeting that temporary pauses in RMPs could occur if warranted
• Perli indicated money market conditions may tighten in July and August due to large net Treasury bill issuance, potentially requiring increased reserve management buying
• The purchases successfully helped the Fed navigate tax season (mid-April deadline) and maintain firm interest rate control

Market Implications:

Perli's comments suggest the Fed may need to increase future Treasury bill purchases as money markets absorb significant bill issuance over the coming months. This could shift the reserves demand curve upward, requiring more active liquidity management.

Additional Notes:

• The New York Fed's desk is prepared to implement potential balance sheet changes under new Fed Chairman Kevin Warsh
• Perli noted "encouraging signs" of increased market participant willingness to use standing repo operations
• He suggested centrally clearing standing repo operations would reduce costs for market participants and benefit monetary policy implementation

The flexible approach signals the Fed's commitment to maintaining market stability while adapting to evolving liquidity conditions in short-term money markets.