Liquidity worries eased? Fed hits the "pause" button again, reserve management bond purchases halted until mid-October.

The Federal Reserve said on Monday it will refrain from conducting reserve management purchases of short-term Treasuries in the next phase for a second consecutive month, a sign that policymakers are comfortable with the level of bank reserves in the financial system. While the New York Fed's Open Market Operations desk does not plan to conduct reserve management purchases during the monthly period through Oct. 14, it still plans to conduct about $15.6 billion in reinvestment purchases during that period, according to information on its website. The pause suggests the Fed is confident about the smooth functioning of funding markets. That has been borne out: for most of the past month, the secured overnight financing rate, a benchmark for borrowing costs secured by Treasuries, has been at or below the interest on reserve balances rate, while the U.S. Treasury has cut back on bill supply ahead of the quarterly tax deadline. But the change does not signal any shift in monetary policy or balance sheet strategy. Wall Street strategists at Wells Fargo and Bank of America had expected reserve management purchases to pause this month and resume in mid-October, as they anticipate localized pressure in funding markets when the Treasury ramps up bill issuance starting next month. Barclays strategist Samuel Earl expects purchase volumes to pick back up to $10 billion in October and $20 billion in November. Citigroup strategists, however, believe the Fed will maintain the pause for the rest of the year, citing bank reserve balances that have been pushed back to a "mildly ample" state. As of Sept. 9, bank reserves stood at $3.04 trillion, up from $2.85 trillion at the end of last year and above this year's average of $3.01 trillion. It is understood that the Fed abruptly halted its balance sheet runoff so-called quantitative tightening (QT) at the end of 2025 and shifted to injecting reserves back into the financial system by purchasing short-term Treasuries maturing within one year. Fed policy pivot In December, the Fed began buying about $40 billion of short-term Treasuries per month to ease mounting pressure in short-term rates. At the time, then-Chair Jerome Powell said the Fed was making "front-loaded" purchases to ensure markets had sufficient reserves during the April tax season. In April, the Fed sharply cut reserve management purchase volumes to $25 billion. Officials had previously said that given uncertainty and various factors, the decline in purchase volumes could be "relatively gradual," and the reduction exceeded market expectations. In May, purchase volumes plunged further to $10 billion, again surprising the market; by August, the Fed simply paused the operation. In June, the Federal Open Market Committee (FOMC) revised its policy implementation statement to explicitly state that reserve management purchases could be temporarily suspended if money market conditions warranted, reflecting the Fed's flexibility in setting subsequent purchase volumes. Roberto Perli of the New York Fed reiterated in July that reserve management purchases do not follow a preset path, and the desk can raise or lower purchase volumes in any given month based on money market conditions, and will continue to determine purchase amounts with the goal of keeping reserves in an ample range. Over the past month, cash supply in the market has far exceeded pledgeable collateral, leaving overall funding conditions easy: banks have continued to channel funds into short-term markets, and money market fund assets have hit a record high. This has helped keep money market rates at their anchored levels even as the Treasury issued large amounts of bills into the market.