NY Fed’s Perli: Plenty of Room Left to Shrink Fed Holdings, According to Reuters

By Michael S. Derby

NEW YORK – The official overseeing the Federal Reserve’s extensive holdings of cash and bonds indicated on Thursday that there remains substantial capacity for further reduction of the central bank’s balance sheet.

Roberto Perli, manager of the Fed’s System Open Market Account, stated, "For now, pressures in the repo market don’t appear to be close to the point where they would start affecting the federal funds rate." He expressed confidence that there is ample opportunity to continue diminishing the Fed’s holdings, which currently amount to approximately $7.2 trillion.

Perli’s remarks come after the Fed recently marked the two-year anniversary of its initiative to decrease the size of its holdings, which were significantly expanded in response to the market turmoil ignited by the pandemic. Beginning in the spring of 2020, the Fed aggressively purchased Treasury and mortgage securities, more than doubling its portfolio to $9 trillion.

In recent years, the Fed has been allowing its bonds to mature without reinvestment, aiming to withdraw pandemic-era liquidity while maintaining sufficient market liquidity for normal fluctuations in money market rates. This approach also supports the central bank’s control over short-term interest rates.

Fed officials are monitoring the situation closely, uncertain of how extensive their efforts will need to be and vigilant for signs of tightening liquidity in the markets. Despite ongoing rate cuts, Fed Chair Jerome Powell reaffirmed last week that the Fed intends to continue its balance sheet reduction.

Perli noted that although repo market rates have been increasing, this may not necessarily indicate a tightening of liquidity. He identified "frictions" within the repo market that complicate the liquidity redistribution process. Increased concentration in the market has made it more challenging for firms to trade effectively with one another.

Perli pointed out that these frictions are evident in the substantial remaining balances at the New York Fed’s reverse repo facility, even in instances where private sector market investments may offer superior rates.