The Fed's Balance Sheet and ON RRP
The Federal Reserve Bank of New York's Liberty Street Economics blog posted two articles on "The Fed's Balance Sheet" earlier this week. The first, "The Fed's Balance Sheet Runoff and the ON RRP Facility," tells us, "A 2017 Liberty Street Economics post described the balance sheet effects of the Federal Open Market Committee's decision to cease reinvestments of maturing securities -- that is, the mechanics of the Federal Reserve's balance sheet 'runoff.' At the time, the overnight reverse repo (ON RRP) facility was fairly small (less than $200 billion for most of July 2017) and was not mentioned in the post for the sake of simplicity. Today, by contrast, take-up at the ON RRP facility is much larger (over $1.5 trillion for most of 2022). In this post, we update the earlier analysis and describe how the presence of the ON RRP facility affects the mechanics of the balance sheet runoff." Written by Marco Cipriani, James Clouse, Lorie Logan, Antoine Martin, and Will Riordan, the blog states, "In the exhibit below, we describe simplified balance sheets for the Fed, the Treasury, banks, and money market funds (MMFs). We only show the balance sheet items that are essential for understanding the mechanics related to the Fed's actions. In a follow-up post, we consider the role of levered nonbank financial institutions and households.... On MMFs' balance sheet, the asset side contains Treasury securities, deposits at banks, and investments in the ON RRP facility; on the liability side, there are MMF shares held by households. In contrast to banks and the Treasury, MMFs cannot hold balances in a Fed account; however, MMFs have access to the ON RRP facility (MMFs with ON RRP access accounted for approximately 80 percent of MMF assets under management at the end of 2021)." The second posting, "The Fed's Balance Sheet Runoff: The Role of Levered NBFIs and Households," comments, "In a Liberty Street Economics post that appeared yesterday, we described the mechanics of the Federal Reserve's balance sheet 'runoff' when newly issued Treasury securities are purchased by banks and money market funds (MMFs). The same mechanics would largely hold true when mortgage-backed securities (MBS) are purchased by banks. In this post, we show what happens when newly issued Treasury securities are purchased by levered nonbank financial institutions (NBFIs) -- such as hedge funds or nonbank dealers—and by households." This post adds, "`The actual evolution of private-sector balance sheets could involve adjustments similar to those outlined in the various scenarios described in our previous post on balance sheet runoff and in this one. These scenarios indicate that the adjustments in private-sector balance sheets can be quite complex, involving flows across markets and institutions that exceed the dollar value of the net increase in securities holdings by the private sector. Also, whether the adjustment on the Fed's balance sheet happens through a reduction of reserves or of ON RRP investment depends on the type of securities that the Treasury issues (that is, whether MMFs can hold these securities), as well as on the relative return on different types of money market instruments."
