Purchases of agency MBS increase the quantity of reserve balances in the banking system; sales or principal paydowns reduce those balances. These transactions, which are conducted by the New York Fed's Open Market Trading Desk (the Desk), are executed with primary dealers.
The Desk purchases agency MBS and reinvests the principal payments from agency debt and agency MBS holdings in the SOMA portfolio by investing in recently issued MBS securities backed by Fannie Mae, Freddie Mac, or Ginnie Mae as directed by the FOMC. Details of the current SOMA portfolio management strategy are outlined in the most recent operating policy statement. Additional information on agency MBS operations is available in the FAQs on Agency MBS Purchases.
From early 2009 through October 2014, the Federal Reserve added on net approximately $1.8 trillion of longer-term agency MBS and agency debt securities to the SOMA portfolio through its large-scale asset purchase programs. Agency MBS purchases were concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market, as these securities have greater liquidity and are closely tied to primary mortgage rates. The aim of these purchases was to put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. From October 2014 through March 2020, the Federal Reserve reinvested agency debt maturities and agency MBS principal payments of the SOMA into agency MBS, with the size of monthly reinvestments subject to a cap starting in September 2017. The Federal Reserve began to add agency MBS to the SOMA portfolio again in March 2020. The FOMC currently directs the Desk to increase SOMA holdings of agency MBS by $40 billion per month.
For Agency Commercial Mortgage Backed Securities, see here.