Market-Based Indicators on the Road to Ample Reserves

As noted in the excerpt above, the FOMC's Plans for Reducing the Size of the Federal Reserve's Balance Sheet envisioned a methodical approach to balance sheet normalization in which the passive runoff of securities holdings would stop when reserves levels are "somewhat above the level it judges to be consistent with ample reserves." Once balance sheet runoff stops, reserve balances would continue to decline with the growth of non-reserve liabilities for some time until they reach ample levels. The SOMA portfolio would then start growing with reserve management purchases in line with the growth in non-reserve liabilities. In light of lessons learned during the 2017-2019 balance sheet normalization, the Committee was mindful of the uncertainties surrounding estimates of the demand for reserves and sought to follow a process that would allow for careful monitoring of market conditions in determining when to "slow and then stop" balance sheet runoff.2The process of balance sheet runoff has proceeded very smoothly to date. The Federal Reserve's securities holdings have declined by nearly $2 trillion since the beginning of balance sheet runoff. As noted in a recent speech by Roberto Perliâthe current manager of the System Open Market Accountâa range of key metrics suggests that reserves remain abundant with few if any signs of significant market pressures of the type observed over 2018 to 2019.3Still, as Perli noted, the Federal Reserve continues to closely monitor a wide range of market indicators as well as information gleaned from surveys and contacts with market participants in assessing reserve market conditions during the transition to ample reserves.