Just Released: Updated SOMA Portfolio and Income Projections   Liberty Street Economics
Liberty Street Economics

« How the Fed Changes the Size of Its Balance Sheet | Main | How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed Securities »

July 10, 2017

Just Released: Updated SOMA Portfolio and Income Projections



LSE_2017_Updated SOMA Portfolio and Income Projections

The Federal Reserve Bank of New York’s Markets Group today published a report presenting updated staff projections for the future path of domestic securities held in the System Open Market Account (SOMA) and portfolio-related income. The updated projections incorporate very recent information and are provided as a tool for the public to further understand factors affecting the evolution of the Federal Reserve’s balance sheet.

Scenarios in the updated projections take account of details communicated by the Federal Open Market Committee (FOMC) after its June 2017 meeting about the approach it plans to use to reduce the Federal Reserve’s securities holdings. Specifically, the FOMC intends to decrease the reinvestment of principal payments from securities held in the SOMA in a gradual and predictable manner, using a set of gradually increasing caps on the dollar amounts of Treasury and agency securities that are allowed to run off each month. (As the caps are phased in, reinvestments will decline, and the monthly reductions in the Federal Reserve’s securities holdings will become larger.)

The projection scenarios also incorporate financial forecasts, expectations for when portfolio reductions will commence, and expectations for the long-run size and composition of the Federal Reserve’s balance sheet, all based on the surveys of primary dealers and market participants conducted by the New York Fed ahead of the June 2017 FOMC meeting. The new projections update the year-end 2016 projections that were published earlier this year in the New York Fed’s annual report on domestic open market operations.

Public interest in the size and composition of the Federal Reserve’s balance sheet has grown since the FOMC began using the balance sheet as an active tool for monetary policy implementation during the global financial crisis. Holdings of domestic securities in the SOMA, which represent assets and liabilities associated with the Federal Reserve’s open market operations, drove the growth of the balance sheet through several rounds of large-scale asset purchases from 2009 to 2014. Public attention has now turned to how the FOMC will reduce these securities holdings in order to “normalize” the size and composition of the SOMA securities portfolio and the Federal Reserve’s balance sheet.

Since 2011, the New York Fed has published projections in its annual report on domestic open market operations to enhance transparency around the FOMC’s portfolio-related policy decisions by showing how the portfolio and associated income could evolve under a baseline scenario (drawn from publicly available information) and alternative scenarios. The updated projections in today’s report illustrate how the FOMC’s program of gradually increasing caps would apply to the treatment of principal payments on Treasury securities and agency mortgage-backed securities (MBS), assuming that the FOMC announces a change to its reinvestment policy in December 2017, in line with survey respondents’ modal expectation. The report also demonstrates how the caps would affect agency MBS in the event of a substantial downward shock to primary mortgage rates. The report then illustrates how the portfolio’s projected size, composition, and income might be affected by different long-run balance sheet sizes.

These portfolio and income projections are merely illustrative. The actual portfolio path and future income will be influenced by a range of factors, including decisions the FOMC makes about its securities portfolio and long-run framework, as well as interest rate, economic, and autonomous balance sheet developments. Nevertheless, the projection exercise aims to add to the public’s understanding of the relationships among these factors. Markets Group staff plan to update these projections in the next annual report on domestic open market operations.


Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.





Fleming_michaelMichael Fleming is a vice president in the Federal Reserve Bank of New York’s Research Group.

Herman_gabrielGabriel Herman is an associate in the Bank's Markets Group.


Deborah Leonard is a vice president in the Bank's Markets Group.

Na_daveDave Na is a senior associate in the Bank's Markets Group.


Stowe_lisaLisa Stowe is an officer in the Bank's Markets Group.



How to cite this blog post:
Michael Fleming, Gabriel Herman, Deborah Leonard, Dave Na, and Lisa Stowe, “Just Released: Updated SOMA Portfolio and Income Projections,” Federal Reserve Bank of New York Liberty Street Economics (blog), July 10, 2017, http://libertystreeteconomics.newyorkfed.org/2017/07/just-released-updated-soma-portfolio-and-income-projections.html.
Posted by Blog Author at 10:00:00 AM in Federal Reserve, Monetary Policy
Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.

About the Blog
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan, all economists in the Bank’s Research Group.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.


Economic Research Tracker

Liberty Street Economics is now available on the iPhone® and iPad® and can be customized by economic research topic or economist.


Useful Links
Comment Guidelines
We encourage your comments and queries on our posts and will publish them (below the post) subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted after COB on Friday will not be published until Monday morning.
Please be aware: Comments submitted shortly before or during the FOMC blackout may not be published until after the blackout.
Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. We reserve the right not to post any comment, and will not post comments that are abusive, harassing, obscene, or commercial in nature. No notice will be given regarding whether a submission will or will not be posted.‎
Disclosure Policy
The LSE editors ask authors submitting a post to the blog to confirm that they have no conflicts of interest as defined by the American Economic Association in its Disclosure Policy. If an author has sources of financial support or other interests that could be perceived as influencing the research presented in the post, we disclose that fact in a statement prepared by the author and appended to the author information at the end of the post. If the author has no such interests to disclose, no statement is provided. Note, however, that we do indicate in all cases if a data vendor or other party has a right to review a post.
Archives