Federal Reserve survey: Respondents expect RMP to purchase about $220 billion in short-term U.S. Treasuries over the next 12 months.

According to the expectations of respondents in a Federal Reserve survey, as part of efforts to ease pressure in the money markets, the scale of the Federal Reserve’s Reserve Management Purchases (RMP) over the next 12 months is expected to exceed $200 billion.

At its December 9-10 meeting, the Federal Reserve decided to start purchasing short-term U.S. Treasury bills (T-bills). They believe that the level of reserves in the financial system has dropped to a level considered “ample,” as evident from the rise in short-term financing costs. Although bank reserve levels fluctuate over time, cash demand tends to rise at the end of months and quarters when tax and other settlement payments become due.

The Federal Reserve stated in the minutes of the December FOMC meeting released on Tuesday: “Although respondents’ estimates for the expected purchase amount varied considerably, on average they expect the net purchase amount to be about $220 billion in the first 12 months after the start of purchases.”

The Federal Reserve stated it will initially purchase short-term U.S. Treasury bills at a rate of about $40 billion per month, and then gradually decrease the scale of purchases. So far this month, the Federal Reserve has bought about $38 billion in short-term U.S. Treasury bills, and will conduct two more operations in January next year.

The Federal Reserve policymakers stressed that these purchases are solely tools for reserve management and are not the same as the Fed’s broader monetary policy stance or efforts to stimulate the economy.

According to the latest meeting minutes from the Federal Reserve, before making this decision, some participants noted that the pace at which money market rates rose relative to the Fed’s administered rates was faster than during the balance sheet reduction period from 2017-2019.

Due to signs of stress in the $12.6 trillion repo market, the Federal Reserve earlier this month halted its process of shrinking its asset holdings, known as quantitative tightening (QT). The increase in the issuance of short-term U.S. Treasury bills since the summer, combined with continued QT, is draining cash from money markets, consuming the Federal Reserve’s primary liquidity tools, and pushing up short-term interest rates.

The concern is that insufficient liquidity could disrupt the crucial “plumbing system” in financial markets, weaken the Fed’s ability to control its interest rate policy, and in extreme cases, force market participants to liquidate positions, causing shocks to spread to the broader U.S. Treasury market, which is the benchmark for global borrowing costs.

The minutes of the December Federal Reserve meeting also recorded discussions among Fed officials on how to define and target an appropriate level of bank reserves in the system. Some participants pointed out that, given that demand may change, it is more attractive to focus on the level of money market rates relative to the interest rate paid on reserve balances rather than setting a specific reserve number.

An important benchmark rate linked to the overnight funding market—the Secured Overnight Financing Rate (SOFR)—was set at 3.77% on December 29, according to data released Tuesday by the New York Fed, 12 basis points higher than the interest rate the Fed pays on reserve balances.

The minutes stated: “Several participants believed that if the definition of ‘ample reserves’ results in a supply of reserves exceeding what is necessary for the implementation committee’s policy framework, it could trigger excessive risk-taking by highly leveraged investors.”

Some Fed officials also suggested that the Standing Repo Facility, as a liquidity backstop, could play a more active role in rate control and allow the Fed to maintain a smaller balance sheet on average. However, some officials said they preferred to rely on Reserve Management Purchases (RMP).

Although the use of the Fed’s Standing Repo Facility has increased recently, market participants remain reluctant to follow officials’ encouragement to use this facility more, in part due to the negative stigma associated with borrowing directly from the Fed.

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