System Open Market Account

Last updated

The System Open Market Account (SOMA) is a securities portfolio managed by the Federal Reserve Bank of New York, that holds the assets it has purchased through open market operations (OMOs) in the course of carrying out monetary policy. Through SOMA transactions, the Federal Reserve System influences interest rates and the amount of reserves in the US banking system. [1] Income from SOMA assets also provides funding for the Federal Reserve's activities, which are not funded by Congress. The Federal Open Market Committee (FOMC) instructs the Reserve Bank of New York as to how it should use the SOMA to support monetary policy.

Contents

Purpose

SOMA's primary purpose is to assist the New York Fed in carrying out open market operations (OMOs) and foreign exchange interventions (the U.S. Treasury, in consultation with the Federal Reserve System, is responsible for setting U.S. exchange rate policy). The U.S. monetary authorities—the Treasury and the Fed—may intervene in the foreign exchange market to counter disorderly market conditions, using funds that belong to the Federal Reserve and to the Exchange Stabilization Fund (ESF) of the Treasury Department.

Following the global financial crisis of 2007-2008 leading to the Great Recession, the FOMC "increased the size and adjusted the composition of the SOMA portfolio in efforts to promote the Committee’s mandate to foster maximum employment and price stability". [2]

SOMA securities serve three purposes: [1]

SOMA portfolio

The resulting investments are held in the SOMA portfolio. Interest on the portfolio provides virtually all of the Fed's income, but the central bank buys and sells securities purely to implement U.S. monetary policy and not for profit.

The SOMA consists of the Federal Reserve's domestic and foreign portfolios. As of the end of 2008, the domestic portfolio consisted of U.S. Treasury securities held $496 billion in securities outright and $80 billion in repurchase agreements (i.e., on a temporary basis). The SOMA foreign currency portfolio consisted of $25 billion denominated in euros and yen. Reciprocal currency arrangements with foreign institutions totaled $554 billion. [3]

Ownership of the SOMA and its income is allocated among the Reserve Banks during the system's annual settlement of balances. The settlement process makes use of the system's gold certificates that, despite the abandonment of the gold standard in the 20th century, still have a nominal role in backing US currency. Ownership of the foreign portfolio is determined first by allocating each Reserve Bank a share in proportion to its year-end capital and surplus. The change in its ownership from the previous allocation is offset with an adjustment to the Reserve Bank's clearing balance with the rest of the system. Next, each Reserve Bank calculates its average daily clearing balance during the past year. It adjusts its ownership of the gold certificates by that amount and makes an offsetting adjustment to its current clearing balance. Finally, each Reserve Bank adjusts its gold certificate ownership again so that the ratio of its ownership to its outstanding Federal Reserve Notes matches the systemwide ratio, and makes an offsetting adjustment to its ownership of the domestic portfolio. The resulting ownership percentages are then effective for the following year. [4]

The New York Fed has an open data web page that allows people to export historical data of SOMA holdings from 2003 to the present as a Microsoft Excel spreadsheet. SOMA holdings data is updated weekly. [1]

Related Research Articles

<span class="mw-page-title-main">Federal Reserve</span> Central banking system of the United States of America

The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.

<span class="mw-page-title-main">Federal Reserve Act</span> 1913 United States law creating the Federal Reserve System

The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States.

The monetary policy of The United States is the set of policies related to the minting and printing of United States dollars, plus the legal exchange of currency, demand deposits, the money supply, etc. In the United States, the central bank, The Federal Reserve System, colloquially known as "The Fed" is the monetary authority.

<span class="mw-page-title-main">Federal Reserve Bank</span> American central banking institution

A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve Act of 1913. The banks are jointly responsible for implementing the monetary policy set forth by the Federal Open Market Committee, and are divided as follows:

The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve System that is charged under United States law with overseeing the nation's open market operations. This Federal Reserve committee makes key decisions about interest rates and the growth of the United States money supply. Under the terms of the original Federal Reserve Act, each of the Federal Reserve banks was authorized to buy and sell in the open market bonds and short term obligations of the United States Government, bank acceptances, cable transfers, and bills of exchange. Hence, the reserve banks were at times bidding against each other in the open market. In 1922, an informal committee was established to execute purchases and sales. The Banking Act of 1933 formed an official FOMC.

In macroeconomics, an open market operation (OMO) is an activity by a central bank to give liquidity in its currency to a bank or a group of banks. The central bank can either buy or sell government bonds in the open market or, in what is now mostly the preferred solution, enter into a repo or secured lending transaction with a commercial bank: the central bank gives the money as a deposit for a defined period and synchronously takes an eligible asset as collateral.

<span class="mw-page-title-main">Federal funds rate</span> Interest rates to maintain banks Federal Reserve balance in the U.S.

In the United States, the federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances are amounts held at the Federal Reserve to maintain depository institutions' reserve requirements. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets.

Foreign exchange reserves are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets. Reserves are held in one or more reserve currencies, nowadays mostly the United States dollar and to a lesser extent the euro.

<span class="mw-page-title-main">Criticism of the Federal Reserve</span>

The Federal Reserve System has faced various criticisms since it was authorized in 1913. Nobel laureate economist Milton Friedman and his fellow monetarist Anna Schwartz criticized the Fed's response to the Wall Street Crash of 1929 arguing that it greatly exacerbated the Great Depression. More recent prominent critics include former Congressman Ron Paul.

In macroeconomics and international finance, the capital account, also known as the capital and financial account records the net flow of investment transaction into an economy. It is one of the two primary components of the balance of payments, the other being the current account. Whereas the current account reflects a nation's net income, the capital account reflects net change in ownership of national assets.

<span class="mw-page-title-main">Gold Reserve Act</span> Act of the US Congress

The United States Gold Reserve Act of January 30, 1934 required that all gold and gold certificates held by the Federal Reserve be surrendered and vested in the sole title of the United States Department of the Treasury. It also prohibited the Treasury and financial institutions from redeeming dollar bills for gold, established the Exchange Stabilization Fund under control of the Treasury to control the dollar's value without the assistance of the Federal Reserve, and authorized the president to establish the gold value of the dollar by proclamation.

<span class="mw-page-title-main">Excess reserves</span> Monies held by bank in excess of reserve requirement

Excess reserves are bank reserves held by a bank in excess of a reserve requirement for it set by a central bank.

<span class="mw-page-title-main">Federal Reserve Bank of New York</span> Member Bank of Federal Reserve

The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is responsible for the Second District of the Federal Reserve System, which encompasses the State of New York, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico, and the U.S. Virgin Islands. Located at 33 Liberty Street in Lower Manhattan, it is by far the largest, the most active, and the most influential of the Reserve Banks.

<span class="mw-page-title-main">Federal Reserve Bank of St. Louis</span> Member Bank of Federal Reserve

The Federal Reserve Bank of St. Louis is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., make up the United States' central bank. Missouri is the only state to have two main Federal Reserve Banks. Located in downtown St. Louis, the St. Louis Fed is the headquarters of the Eighth Federal Reserve District, which includes the state of Arkansas and portions of Illinois, Indiana, Kentucky, Mississippi, the eastern half of Missouri and West Tennessee. It has branches in Little Rock, Louisville and Memphis. Its building, at 411 Locust Street, was designed by St. Louis firm Mauran, Russell & Crowell in 1924. The Eighth District serves as a center for local, national and global economic research, and provides the following services: supervisory and regulatory services to state-member banks and bank holding companies; cash and coin-handling for the District and beyond; economic education; and community development resources.

<span class="mw-page-title-main">Quantitative easing</span> Monetary policy tool

Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary policy that came into wide application after the financial crisis of 2007‍–‍2008. It is used to mitigate an economic recession when inflation is very low or negative, making standard monetary policy ineffective. Quantitative tightening (QT) does the opposite, where for monetary policy reasons, a central bank sells off some portion of its holdings of government bonds or other financial assets.

<span class="mw-page-title-main">History of Federal Open Market Committee actions</span>

This is a list of historical rate actions by the United States Federal Open Market Committee (FOMC). The FOMC controls the supply of credit to banks and the sale of treasury securities. The Federal Open Market Committee meets every two months during the fiscal year. At scheduled meetings, the FOMC meets and makes any changes it sees as necessary, notably to the federal funds rate and the discount rate. The committee may also take actions with a less firm target, such as an increasing liquidity by the sale of a set amount of Treasury bonds, or affecting the price of currencies both foreign and domestic by selling dollar reserves. Jerome Powell is the current chairperson of the Federal Reserve and the FOMC.

The U.S. central banking system, the Federal Reserve, in partnership with central banks around the world, took several steps to address the subprime mortgage crisis. Federal Reserve Chairman Ben Bernanke stated in early 2008: "Broadly, the Federal Reserve’s response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy." A 2011 study by the Government Accountability Office found that "on numerous occasions in 2008 and 2009, the Federal Reserve Board invoked emergency authority under the Federal Reserve Act of 1913 to authorize new broad-based programs and financial assistance to individual institutions to stabilize financial markets. Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008."

The interbank lending market is a market in which banks lend funds to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate. A sharp decline in transaction volume in this market was a major contributing factor to the collapse of several financial institutions during the financial crisis of 2007–2008.

Central bank liquidity swap is a type of currency swap used by a country's central bank to provide liquidity of its currency to another country's central bank. In a liquidity swap, the lending central bank uses its currency to buy the currency of another borrowing central bank at the market exchange rate, and agrees to sell the borrower's currency back at a rate that reflects the interest accrued on the loan. The borrower's currency serves as collateral.

<span class="mw-page-title-main">Structure of the Federal Reserve System</span>

The Structure of the Federal Reserve System is unique among all the assets within central banks, with private aspects. It is described as "independent within the government" rather than "independent of government".

References

  1. 1 2 3 "System Open Market Account Holdings". Federal Reserve Bank of New York. Retrieved 20 November 2014.
  2. ↑ Alyssa Cambron; Michael Fleming; Deborah Leonard; Grant Long; Julie Remache (April 17, 2014). "The 2013 Federal Reserve's System Open Market Account (SOMA) Annual Report in a Historical Context". Econintersect.
  3. ↑ "What We Do: System Open Market Account (updated March 2009)". Federal Reserve Bank of New York. Retrieved 20 November 2014.
  4. ↑ Wolman, Alexander L. (2013). "Federal Reserve Interdistrict Settlement" (PDF). Economic Quarterly. Federal Reserve Bank of Richmond. 99 (2). Retrieved 2022-07-23.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.