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.
The Fed bought 2 to 3 year notes.
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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