Fed to Start $40 Billion Monthly Treasury Bill Purchases Around Dec. 16

The New Purchase Program

WASHINGTON. The Federal Reserve has directed the New York Fed's Open Market Trading Desk to begin reserve management purchases of Treasury bills around Dec. 16 at a pace of roughly $40 billion per month, according to two Fed officials familiar with the directive. The purchases are intended to keep bank reserves within the ample range after the FOMC halted balance-sheet runoff, the officials said.

The decision was made at the Dec. 9-10 Federal Open Market Committee meeting, when policymakers lowered the federal funds rate target range by a quarter point to 3.50 to 3.75 percent, effective Dec. 11. The Board of Governors also lowered the interest rate paid on reserve balances to 3.65 percent and approved a primary credit rate of 3.75 percent. The same FOMC statement authorized the Desk to increase System Open Market Account holdings through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of three years or less.

The move is not quantitative easing, the Fed officials emphasized. Reserve management purchases are designed solely to offset growth in nonreserve liabilities such as currency in circulation and the Treasury General Account, whereas the 2020-2022 asset purchases were aimed at lowering longer-term interest rates and supporting credit markets. The officials said the FOMC first laid out this approach in its May 2022 plans for reducing the balance sheet.

Market Mechanics

A trader at a primary dealer said the Desk expects to split the bill purchases between the one-to-four month sector and the four-to-twelve month sector, with roughly three-quarters in the shorter bucket. The trader said the initial purchase period runs from mid-December through mid-January and is sized to offset seasonal drains on reserves, including year-end currency demand and expected tax-payment flows into the Treasury General Account.

The Desk plans to announce the monthly purchase schedule on or around the ninth business day of each month, with purchase periods running mid-month to mid-month. That timing lets the Desk incorporate early-month data on principal payments from agency mortgage-backed securities before it sets the next round of operations.

The New York Fed's annual report on open-market operations, expected around Dec. 31, will show that the Desk purchased a total of roughly $38 billion in Treasury bills for reserve management and reinvestment purposes during December, according to an economist at a Wall Street firm who has reviewed preliminary figures. That total includes agency MBS principal payments being rolled into Treasury bills and outright reserve management purchases. The economist said the Desk bought roughly $24.5 billion in the one-to-four month sector and $13.6 billion in the four-to-twelve month sector.

The FOMC also removed the aggregate limit on standing overnight repurchase agreement operations, a move that gives the Desk unlimited capacity to lend cash to primary dealers against Treasury collateral if money markets tighten. The Fed officials said the standing repo facility will continue to offer overnight funds at a rate of 3.75 percent, matching the primary credit rate, while the overnight reverse repurchase facility will continue to absorb cash at 3.50 percent.

Money market conditions had been tightening in late 2025. The spread between the effective federal funds rate and the interest rate on reserve balances had widened as reserves declined, and usage of the standing repo facility had increased. The effective federal funds rate had drifted toward the upper end of the target range in the weeks before the December meeting, rising above 3.70 percent on several days. The FOMC concluded that reserves had reached the ample level, triggering the shift from balance-sheet reduction to reserve management purchases. The Fed's balance sheet had shrunk from a peak near $8.9 trillion in 2022 to roughly $6.9 trillion by late 2025.

What to Watch

The next FOMC meeting is scheduled for Jan. 27-28, 2026. Fed officials expect policymakers to hold the target range steady while they assess whether inflation continues to ease and whether the labor market stabilizes. Between now and then, market participants will monitor weekly H.4.1 releases for changes in the Fed's Treasury bill holdings and any uptick in use of the standing repo facility.

An economist at a Wall Street firm said traders are pricing in one to two additional rate cuts during 2026, with the first reduction expected around midyear. The economist said the bill purchases are technically neutral but could be read as a dovish signal if the Desk expands beyond the current pace or begins buying short-dated coupon securities. The Jan. 27-28 statement will be watched closely for any change in the description of balance-sheet policy.

The return to outright purchases, even for reserve management, marks a technical but significant shift in monetary policy implementation. If bill purchases grow larger than expected or spill into short-dated coupon securities, investors may treat the move as a stealth easing of financial conditions. Traders will also watch whether the Fed's purchases absorb enough supply to keep short-term rates anchored ahead of heavy Treasury bill issuance expected in early 2026.