Roberto Perli, manager of the Federal Reserve’s System Open Market Account (SOMA), spoke about reserve management and the SOMA portfolio at the Atlanta Fed’s Financial Markets Conference on May 19.
Perli began by reviewing money market conditions during the April tax season and the Open Market Trading Desk’s (the Desk’s) approach to reserve management purchases (RMPs) to maintain ample reserves. The Federal Open Market Committee’s (FOMC’s) decision to begin RMPs in December was informed by an anticipated large and rapid drain of reserves in April amid flows into the Treasury General Account (TGA) during tax season. As expected, the TGA rose quickly amid April tax receipts, and reserves declined by roughly $300 billion in the weeks around the April tax date. However, prior RMPs ensured that reserves remained ample and above levels seen late last year.
Reserves Since the Start of RMPs
Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York
Since the tax date, the TGA has declined, reserves have increased, and money market conditions have softened. As a result, and consistent with previous communications, the Desk has reduced the monthly pace of RMPs.
Reserve Management Purchase Amounts
The Desk’s decisions about RMP sizes are informed by three equally important considerations: its forecast for reserve supply, informed by demand for Federal Reserve liabilities; an assessment of reserve demand, informed by market outreach and the Fed’s twice-yearly Senior Financial Officer Survey (SFOS); and an assessment of money market conditions. RMP decisions are made month-to-month to preserve the flexibility needed to adapt to changing market conditions. RMPs are not on a preset path, and in coming months the Desk is ready to adjust the pace of RMPs as necessary to maintain reserves within the ample range.
Perli then turned to the SOMA portfolio, which currently stands at around $6.4 trillion, or 20 percent of nominal GDP. As a result of the FOMC’s balance sheet reduction from 2022 to 2025, the portfolio is well below its post-pandemic peak of about $8.5 trillion, or 33 percent of nominal GDP.
Total SOMA Holdings as Percent of GDP
Source: Board of Governors of the Federal Reserve System, Bureau of Economic Analysis
The SOMA portfolio’s size is a function of demand for Federal Reserve liabilities, the FOMC’s monetary policy implementation framework, and, within that framework, the FOMC’s tolerance for money market volatility. The primary liabilities driving the Federal Reserve’s balance sheet size are currency (Federal Reserve notes), the TGA, and reserves. Perli focused his remarks on reserves, while noting that some proposals have contemplated ways of reducing the TGA and other non-reserve liabilities.
The Federal Reserve implements monetary policy through an ample reserves framework in which it supplies enough reserves to control short-term interest rates primarily through administered rates. This framework has maintained interest rate control across a range of economic and financial conditions; since December 2008, the effective federal funds rate has been outside of the target range on only two days. The framework also supports the resiliency of funding liquidity within the repo market, which in turn supports Treasury market functioning and broader financial stability.
Perli noted that while the current implementation framework is demonstrably very effective, there is an active public debate about the quantity of reserve supply that it entails. He then outlined two broad approaches available if policymakers wanted to reduce the supply of reserves.
First, policymakers could reduce banks’ demand for reserves, thereby reducing the quantities of reserves consistent with the ample range (see chart below). If reserve demand diminishes, an imbalance between reserve demand and supply will be reflected in money market conditions. The Desk could respond by reducing or stopping RMPs, or advising the Committee on resuming balance sheet runoff. In this scenario, reserves would be lower, but rate control would remain strong because reserve supply would still meet demand.
Shifting the Reserve Demand Curve
Results from the recent SFOS support the plausibility of this approach. Banks cited changes to liquidity regulations as the most important driver that could reduce their preferred reserve levels over the next two years. While surveyed banks generally do not expect material changes in reserve demand over the next year due to regulatory uncertainty, they indicated that risks are skewed toward lower reserve demand.
Second, policymakers could reduce reserve supply and move along the existing demand curve (see chart below). This approach would tighten reserve conditions and likely result in money market rates trading persistently above interest on reserve balances (IORB) and with increased volatility. This would introduce more risks for interest rate control and funding market stability. The SFOS revealed a steep relationship between banks’ reserve holdings and hypothetical increases in interest rates. The survey results implied that banks would have to see large increases in overnight rates to be willing to shed modest amounts of reserves—or, conversely, that a modest decline in reserves could induce a substantial increase in overnight rates. Experience shows increases in money market rates to levels even modestly above IORB can quickly become disruptive to money markets and by extension the Treasury market.
Moving Along the Reserve Demand Curve
Perli concluded by discussing the Fed’s standing repo operations (SRPs), which are a critical tool for ensuring the federal funds rate remains within its target range during periods of elevated money market pressure.
Over the past year, the Desk and FOMC have taken important steps to improve SRP effectiveness: in June 2025 the Desk added a morning operation, with early settlement, alleviating an important friction for many counterparties, and in December 2025 the FOMC removed the aggregate operation limit, while Chair Powell at the FOMC press conference publicly encouraged usage “when economically sensible.”
There are encouraging signs that willingness to use the operations has increased following these actions. For example, in February, March, and April this year, SRP operations were used when market repo rates were just barely above the SRP rate. Recent surveys confirm that bank counterparties are more likely to consider using SRPs than a year ago. Banks reported significantly lower “hurdle spreads”—that is, how far above the SRP rate market repo rates need to be for them to actively consider using SRP operations. Primary dealers indicate even smaller hurdle spreads.
However, there remain impediments to SRP use, including disclosure requirements and balance sheet costs of repo market intermediation funded by SRP usage. Perli noted that centrally clearing SRPs could reduce such costs and further improve participation but emphasized that central clearing is a complex issue where monetary policy implementation considerations would need to be weighed against other policy issues. Fed staff continue to evaluate this topic and other ways to potentially improve SRP efficacy, which may be especially helpful if policymakers desire a smaller SOMA portfolio.
Natalie Leonard is an associate in the New York Fed’s Markets Group.
Eric LeSueur is an advisor in the New York Fed’s Markets Group.
Linsey Molloy is an associate director in the New York Fed’s Markets Group.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
