In particular, we announce a plan around the middle of each month for the purchase operations to take place through the middle of the following month, once we know the principal repayments that will be received over that period. 5 We are running at a pace of $ billion in purchases this month, and we expect that pace to bump up to around $ billion for the next several months. Looking further ahead, we currently project that the cumulative amount of principal payments on agency debt and agency MBS through 2011 will be somewhat higher than the estimates provided at the August FOMC meeting. I should note that the directive to the Desk is expressed in terms of the overall size of the portfolio. However, under the portfolio balance model described above, the effect on markets will be tied to the amount of duration risk that such purchases encompass. Thus, the composition of purchases across maturities will be quite important in governing the effects on financial conditions. The strategy that the Desk has employed for the reinvestment program is to follow the pattern of purchases that was implemented in the earlier Treasury purchase program. The purchases will be concentrated in nominal Treasury securities with remaining maturities  4  Most of the prepayments of MBS in the Federal Reserve’s portfolio are associated with refinancing activity that will result in the production of new MBS that have to be purchased by other market participants.
Before that time, the Federal Reserve maintained a relatively simple portfolio of between $ billion and $ billion of Treasury securities – an amount largely determined by the volume of dollar currency that was in circulation. In late November 2008, in the face of tightening financial conditions and a deep downturn in economic activity, the Federal Reserve announced that it would purchase up to $ billion of agency debt and agency mortgage-backed securities (MBS). In March 2009, it expanded the program to include cumulative purchases of up to $ trillion of agency debt, agency  BIS Review 128/2010  1  MBS, and longer-term Treasury securities. The use of the balance sheet in this manner was spurred in part by the inability to ease further using the traditional policy instrument, as the federal funds rate effectively reached the zero lower bound in late 2008. The asset purchases were carried out from December 2008 through March 2010 by the Trading Desk (the Desk) at the Federal Reserve Bank of New York, resulting in a significant expansion of the Federal Reserve’s portfolio. As the settlement of those purchases progressed, the amount of domestic securities held in the System Open Market Account (SOMA) reached a peak of $ trillion in June 2010. From that point, the portfolio began to shrink because the agency debt and agency MBS held in the SOMA were being allowed to run off without reinvestment as they matured or were prepaid.