Liquidity Unconcerned? The Federal Reserve Hits 'Pause' Again, Ceasing Reserve Management Bond Purchases Until Mid-October

According to Jinse Finance APP, the Federal Reserve stated on Monday that it will not conduct short-term Treasury purchases for reserve management purposes in the next phase for the second consecutive month, indicating that policymakers are satisfied with the level of bank reserves within the financial system.

Although the New York Fed's Open Market Operations Desk does not plan to conduct reserve management bond purchases during the monthly period ending October 14, the Desk still intends to conduct about $1.56 billion in reinvestment purchases during this time, according to information on its website.

This pause suggests the Federal Reserve has confidence in the smooth functioning of the funding markets. This has been proven: for most of the past month, the secured overnight financing rate (the benchmark for borrowing costs backed by Treasuries) has been at or below the interest on reserve balances (IORB); meanwhile, the U.S. Treasury reduced Treasury bill supply ahead of the quarterly tax deadline. However, this change does not indicate any shift in monetary policy or balance sheet strategy.

Wall Street strategists at Wells Fargo and Bank of America had previously expected that reserve management purchases would be paused this month and resume in mid-October, as they anticipate localized pressures in the funding markets when the Treasury increases Treasury bill issuance starting next month. Barclays strategist Samuel Earl expects purchase size to rebound to $1 billion in October and rise to $2 billion in November.

However, Citigroup strategists believe the Federal Reserve will maintain the pause for the remainder of the year, arguing that bank reserve balances have already been pushed back to a "ample" level.

As of September 9, bank reserve balances stood at $3.04 trillion, up from $2.85 trillion at the end of last year and above the year-to-date average of $3.01 trillion.

It is understood that the Federal Reserve abruptly ended its balance sheet reduction process—also known as quantitative tightening (QT)—at the end of 2025, and shifted to reinjecting reserves into the financial system by purchasing short-term Treasuries maturing within one year.

Fed Policy Shift

Last December, the Federal Reserve began purchasing about $4 billion in short-term Treasuries each month to relieve the mounting pressure in short-term rates. At the time, then-Chair Jerome Powell stated the Fed was engaging in "preemptive" purchases to ensure the market had sufficient reserves during the April tax season.

In April this year, the Fed sharply scaled down reserve management purchases to $2.5 billion. Policymakers had previously said that considering uncertainties and various factors, the reduction would be "relatively gradual," but the actual cut exceeded market expectations. In May, purchases further dropped sharply to $1 billion, again surprising markets; by August, the Fed had directly paused the operation.

In June, the Federal Open Market Committee (FOMC) revised its policy implementation statement to clarify that reserve management purchases could be temporarily paused if money market conditions required it, reflecting the Fed’s flexibility in determining subsequent purchase sizes.

In July, Roberto Perli of the New York Fed reiterated that reserve management purchases are not conducted along a preset path; the Desk can increase or decrease purchase volumes in any given month according to money market conditions, and will continue to set purchase amounts to keep reserves within the ample range.

Over the past month, the market's cash supply has far exceeded available collateral, and overall funding conditions have remained loose: banks have continued to inject funds into the short-term market, and money market fund assets have hit record highs. This has helped keep money market rates anchored even as the Treasury issued large amounts of Treasury bills to the market.