Roberto Perli manages the Federal Reserve’s System Open Market Account (SOMA), which includes a portfolio valued at $6.8 trillion. His role involves implementing monetary policy, while overseeing the Fed’s bond and asset management.
The reduction of the Fed’s balance sheet has proceeded smoothly, despite challenges posed by the ongoing debt ceiling discussions. Financial system reserves remain plentiful, and the Fed’s reverse repos may see further reduction, with the potential reinstatement of early morning SRF operations at quarter-end.
Fed’s Balance Sheet Strategy
Since the COVID-19 pandemic, the Fed more than doubled its asset holdings but has since allowed over $2 trillion in Treasury and mortgage bonds to expire without replacement. The central bank aims to cautiously decrease market liquidity to facilitate normal volatility and maintain control over the federal funds rate.
Perli plays a key role in executing policy objectives, with SOMA holdings still substantially larger than they were before 2020. Liquidity withdrawal continues in a steady manner, though with recent shifts in market conditions, it remains necessary to monitor how banks and money market funds adjust to these changes. Excess reserves across the financial system have helped prevent any disorderly market reactions, but funding dynamics could become more sensitive as balance sheet contraction progresses.
The possibility of reinstating early morning Standing Repo Facility operations at quarter-end suggests an effort to preempt liquidity dislocations. When temporary funding needs increase, short-term repo facilities help stabilise overnight rates. Given past quarter-end adjustments, it is reasonable to expect heightened attention to reserve levels in the coming weeks. A slowdown in Fed reverse repos has further indicated that cash parked at the central bank is gradually being absorbed by the system.
Allowing Treasury and mortgage-backed securities to roll off rather than selling them outright has helped maintain stability across funding markets. By doing so, policymakers have avoided unnecessary volatility while guiding overnight rates within an intended range. The approach taken thus far signals a preference for gradual adjustments over abrupt shifts.
Liquidity And Market Stability
Still, the delicate balance between reducing excess liquidity and ensuring smooth market functioning remains at the core of decision-making. With more than $2 trillion in assets already removed from the Fed’s holdings, the question is not whether balance sheet tightening will continue, but rather how financial institutions adapt to these conditions. Reserves remain ample, yet shifts in funding markets warrant ongoing assessment.
While this phase of policy normalisation has avoided major disruptions, market participants should remain attentive to changes in short-term interest rate behaviour. We recognise that reserve availability influences rate dynamics, which means fluctuations in repo activity, Fed holdings, and Treasury issuance levels are all elements to track. The adjustments taking place shape expectations for forward funding costs, reinforcing the need for close observation of liquidity demand and supply mechanics.
