Operating Policy
Statement Regarding Agency Mortgage-Backed Securities
September 14, 2018

Under the June 2017 addendum to the Policy Normalization Principles and Plans, principal payments on the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities (MBS) are reinvested to the extent that they exceed the corresponding monthly cap on redemptions.  Based on current staff projections, principal payments are likely to fall below the cap beginning in October and remain below the cap going forward.  However, given that principal payments on agency MBS are sensitive to changes in long-term interest rates and other factors, it is possible that they will rise above the cap and require agency MBS reinvestment purchases in the future.

In light of this possibility, the Open Market Trading Desk (the Desk) at the New York Fed plans to conduct small value purchases of agency MBS on a regular basis in order to maintain operational readiness.  Under these plans, the Desk will purchase up to $300 million of agency MBS for monthly periods in which principal payments fall below the cap and there is no reinvestment amount.  The Desk will continue to publish its monthly purchase plans on or around the ninth business day of the month and will indicate whether purchases are for reinvestment or small value purposes.

These small value purchases will be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market, which is expected to undergo changes next year due to the FHFA’s Single Security Initiative and the introduction of Uniform MBS (UMBS).  Given these changes, the Desk plans to develop its operational readiness for conducting transactions in UMBS and, to more efficiently manage the SOMA portfolio, convert some of its agency MBS holdings to UMBS where appropriate.  These are matters of prudent advance planning and portfolio administration by the New York Fed, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future from them.

Additional information can be found in the Desk’s Frequently Asked Questions:
FAQs: Agency MBS Reinvestment Purchases ยป

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