Warsh makes another baby step — as suggested at his first FOMC meeting.

By Wolf Richter for WOLF STREET.

The Federal Reserve Bank of New York announced this afternoon that it would halt Reserve Management Purchases (RMPs) for the period of August 14 through September 14, after having already tapered the RMPs to $10 billion a month, including for the current period through August 13.

RMPs were started in mid-December. Under this program, the Fed purchased $40 billion of Treasury bills (Treasury securities with terms of 1 year or less) in the mid-month to mid-month periods, to increase the reserve balances so that there would be enough liquidity to deal with the liquidity distortions associated with April 15 Tax Day that might otherwise cause repo market rates to wobble.

After April 15, the Fed tapered the RMPs to $10 billion a month. And now to zero.

The possibility of reducing RMPs to zero was among the changes of Warsh’s first meeting as FOMC Chair on June 17.

The sentence in the FOMC’s Implementation Notes (released alongside the FOMC statement) regarding the RMPs was changed to “When appropriate, increase…” from Powell’s version of “Increase…”:

The Implementation Notes under Warsh, June 17:

“When appropriate, increase the System Open Market Account holding of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves.”

The Implementation Notes under Powell, April 29:

“Increase the System Open Market Account holdings of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves.”

This could be Warsh’s first baby step, the least controversial one, to rein in the Fed’s balance sheet. Monetary policy decisions have to be made by vote of the 12 voting participants on the FOMC, and he appears to be struggling to build a majority for anything other than maintaining the status quo.

These RMPs have increased the Fed’s balance sheet, which has risen to $6.76 trillion as per the balance sheet released today.

MBS will continue to run off the balance sheet on automatic pilot and be replaced with T-bills, the New York Fed reiterated this afternoon.

MBS come off the balance sheet mostly via passthrough principal payments when the underlying mortgages get paid off or get paid down, and the pace depends on the mortgage market and is difficult to predict. Since mortgage rates have risen, causing mortgage refinancing volume to collapse, the flow of mortgage payoffs has slowed, and the MBS runoff has become a trickle, mostly between $15 billion and $18 billion a month. The Fed no longer caps the runoff of these MBS. But the runoff amount is replaced with T-bills.

The Fed estimated that the MBS runoff during the August 14 through September 14 period will be about $17 billion, and that it would therefor purchase $17 billion in T-bills during that period to replace those MBS.

With this process, the Fed is removing long-term securities from its balance sheet and is replacing them with short-term securities.

Since the fall of 2022, the Fed has reduced its holdings of MBS by $809 billion, or by 29%, as of the balance sheet released today. The Fed only holds government guaranteed “agency” MBS where the taxpayer takes the credit risk.

Compared to GDP: The ratio of the Fed’s total assets to GDP has continued to decline, despite the RMPs, but the RMPs slowed the decline of that ratio. At the end of Q2, the ratio of total assets to GDP dropped to 20.7% of Q2 GDP.

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