Reserve Management Purchases Hit Zero, and the Balance Sheet Goes Back to Being a Swap

The Federal Reserve Bank of New York said on the afternoon of August 13 that it will make no Reserve Management Purchases in the August 14 to September 14 period, zeroing out a program that was buying $40 billion of Treasury bills a month as recently as the run-up to the April tax date ^[1][3][5]. The taper is now complete, and the practical consequence is that the securities portfolio stops growing and goes back to being a composition trade.

RMPs started in mid-December ^[3]. The stated job was narrow: add reserve balances so there was enough liquidity to absorb the distortions around April 15 Tax Day without repo rates wobbling ^[4]. After April 15 the desk cut the pace to $10 billion a month, where it stayed through the period ending August 13 ^[2][5]. Zero is the third step, and not an unsignalled one. The possibility was already on the table at Kevin Warsh's first FOMC meeting as chair on June 17, when the Implementation Notes were rewritten from Powell's flat instruction to "Increase the System Open Market Account holdings of securities through purchases of Treasury bills" to "When appropriate, increase..." ^[6][7]. Two words of conditionality did the work.

At peak the program ran at a $480 billion annualised rate of bill buying; at $10 billion a month it was $120 billion; now it is nothing ^[20]. What has not stopped is reinvestment. The New York Fed reiterated that MBS keep running off on automatic pilot and get replaced with T-bills, and it estimated about $17 billion of MBS paydowns for the August 14 to September 14 window, matched by $17 billion of bill purchases ^[11][13]. Gross bill buying therefore drops to roughly $17 billion from something like $25 billion to $28 billion in the prior period, while total holdings stay roughly flat and long paper keeps coming out ^[19][21].

That runoff is slow because it is not being managed. The Fed no longer caps it, so the pace is whatever mortgage payoffs deliver, and with mortgage rates higher and refinancing volume collapsed it has been mostly $15 billion to $18 billion a month ^[12]. Since the fall of 2022 the Fed has taken $809 billion, or 29%, off the MBS book ^[14], which implies roughly $2.8 trillion at the peak and roughly $2.0 trillion still on the books ^[17]. At $17 billion a month, clearing that is on the order of a decade ^[18]. All of it is government guaranteed agency paper, where the taxpayer carries the credit risk ^[15].

Total assets stood at $6.76 trillion on the balance sheet released August 13, a level the RMPs helped lift ^[10]. The ratio of total assets to GDP ended Q2 at 20.7%, still declining, though the RMPs slowed the decline ^[16]. Wolf Richter's read is that this is Warsh's first and least controversial step toward reining in the balance sheet, and that he is struggling to build a majority among the FOMC's 12 voting participants for anything other than the status quo ^[8][9].

For operators, the read-through is mechanical rather than dramatic: no new reserves are being added by purchase, and the only bid left is the one that replaces mortgage paydowns.