Enhancing Central Bank Preparedness for Market-Functioning Asset Purchases

The Federal Reserve recently issued a white paper abstract, "Central bank preparedness for market-functioning asset purchases as a consideration for long-run balance sheet composition," proposing an approach to enhance the Fed's readiness to undertake market-functioning asset purchases during Treasury market disruptions. The paper suggests that by adjusting the SOMA Treasury portfolio, the Fed can create a "war chest" for undertaking market-functioning asset purchases without expanding the balance sheet or increasing reserves. This approach could help the Fed respond to Treasury market disruptions without facing lengthy timeframes for restoring the portfolio to its pre-stress composition.

Key Takeaways:

• The Federal Reserve proposes an approach to enhance its readiness to undertake market-functioning asset purchases during Treasury market disruptions through an adjusted SOMA Treasury portfolio.
• By tilting the portfolio toward bills, 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 enables market-functioning asset purchases to be made without expanding the balance sheet or increasing reserves, avoiding the need for close monitoring of reserves when asset purchases are eventually unwound.
• Under reasonable assumptions, bills portfolio shares ranging up to around 40% could be desirable, twice that of the 20% proportionate portfolio.
• The Fed finds that restoring the SOMA Treasury portfolio and war chest to its pre-stress composition by allowing purchased coupon securities to mature and reinvesting these proceeds into bills would take 2-1/2 to 5-1/2 years, limiting the Federal Reserve's ability to respond to Treasury market disruptions for many years.
• The proposed approach aims to differentiate between asset purchases undertaken to support market functioning and asset purchases undertaken to ease financial conditions.

Statistics:

• Bills portfolio shares could range up to around 40% under reasonable assumptions, twice that of the 20% proportionate portfolio.
• Restoring the SOMA Treasury portfolio and war chest to its pre-stress composition would take 2-1/2 to 5-1/2 years.
• Market-functioning asset purchases can be made without expanding the balance sheet or increasing reserves.

Sources:

• [1] Federal Reserve. (2025). Central bank preparedness for market-functioning asset purchases as a consideration for long-run balance sheet composition. [Abstract]. doi: 10.17016/FEDS.2025.077
• [2] Federal Reserve. (2025). Central bank preparedness for market-functioning asset purchases as a consideration for long-run balance sheet composition. [Full Paper].