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Today’s POMO 9/26/2019 – Here’s What $1.6B Coupon Purchase Does

This is a syndicated repost courtesy of NY Fed | Treasury Securities Operations. To view original, click here. Reposted with permission.

In today’s POMO (Permanent Open Market Operations), the Fed bought $1.6 billion in coupons.  The purpose was to offset the shrinkage of its MBS portfolio that occurs in the normal process of mortgage prepayments.

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The Fed bought 2 to 3 year notes.

Today's POMO

These purchases merely keep the size of the Fed’s balance sheet at the same level. However, they do inject cash into Primary Dealer accounts. The dealers sell notes and bonds to the Fed. The Fed pays them by crediting Primary Dealers’ “checking accounts” at the Fed with cash. Thus liquified, the dealers can then buy more securities.

NY Fed – “Monetary policy can be implemented through outright purchases or sales of securities, which permanently changes the size of the Federal Reserve’s System Open Market Account (SOMA) portfolio.”

Without these POMO purchases, the SOMA would shrink. The POMO purchases replace the declining MBS holdings in the SOMA.

The MBS paydowns drain cash from the banking system, but they do not reduce Primary Dealer cash. In contrast, with POMO, the Fed purchases Treasuries in trades with Primary Dealers. They directly inject cash into dealer accounts.

Current POMO operations are too small to have a significant impact on the markets and financial system. So the Fed must issue massive amounts of repos in TOMO (Temporary Open Market Operations). Even with  regular POMO injections, the system ran short of the cash needed to absorb the constant flood of new Treasury issuance.

For more on this story see Fed POMO – Permanent Open Market Operations – US: $1.801B Coupon Purchase 2019-09-25

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Wall Street Examiner Disclosure:Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. I may receive promotional consideration on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. No endorsement of third party content is either expressed or implied by posting the content. Do your own due diligence when considering the offerings of information providers.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

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