Jun 30, 2022
The assets in the SOMA serve as a management solution for the Federal Reserve's investments, a store of liquidity that can be used in an emergency incident where the need for liquidity arises. All of these functions are performed by the assets in the SOMA. Short-term deals are repurchase agreements and reverse, which shift daily as a result of commercial transactions rather than make a significant adjustment to the System's liquidity due to a policy change.
The SOMA assets comprise the Federal Reserve's domestic securities portfolio and its foreign currency portfolio. The domestic part is made up of United States Treasuries that are denominated in dollars. The foreign currency element of the portfolio is made up of a diverse selection of assets. Federal Reserve Bank of New York's Open Market Desk, more popularly known as the New York Fed. The Federal Reserve Open Market Committee is responsible for making decisions on the policies that govern such transactions (FOMC).
The investments produced as a consequence are kept in the SOMA portfolio. The vast majority of the Federal Reserve's revenue comes from the interest earned on the portfolio; nonetheless, the Fed buys and sells assets, not for financial gain but to carry out the objectives of the United States monetary policy.
The domestic and international portfolios of the Federal Reserve are included inside SOMA. The domestic portfolio was made up of United States Treasury securities as of 2008. It had a total of $496 billion in assets owned outright, in addition to $80 billion in repurchase agreements (i.e., temporarily). The foreign currency holdings held by SOMA totaled $25 billion and were denominated in yen and euros, respectively. The entire amount of $554 billion was reached via reciprocal currency agreements with international entities. The data on SOMA holdings is updated every week.
The main objective of the System Open Market Account (SOMA) is to assist the New York Federal Reserve in the conduct of open market operations (OMOs) and foreign currency interventions. It is possible for the monetary authorities in the United States, which include the Federal Reserve and the Treasury Department's Exchange Stabilization Fund (ESF), to take action to combat disorderly market conditions by intervening in the foreign exchange market with funds that the Federal Reserve and the ESF own. The following are the three functions that SOMA securities serve:
The Federal Reserve is charged with several important responsibilities, chief among which are the formulation of monetary policy for the United States and the conduct of transactions designed to put that policy into effect. When the Federal Reserve decides on a target for the Federal Funds Rate, the interest rate at which banks lend money to one another, it will buy and sell securities held in the account System. When the Fed wants to increase the amount of liquidity in the economy, it will sell assets while simultaneously buying securities. These deals may take the form of outright purchases and sales. Short-term deals are repurchase agreements and reverse, which shift daily as a result of commercial transactions rather than make a significant adjustment to the System's liquidity due to a policy change.
Historically, to influence short-term interest rates, the Federal Reserve has done so by buying and selling short-term U.S. Treasury notes. In addition, beginning in October 2008 and continuing until October 2014, the Federal Reserve acquired significant quantities of long-term U.S. Treasury bonds in response to the financial market's collapse. The objective was to bring down long-term interest rates and boost the United States economy.
In addition, the Federal Reserve increased financing for mortgage lending by purchasing substantial amounts of mortgage-backed securities from government-sponsored financial institutions such as Fannie Mae, Freddie Mac, and Ginnie Mae. This action was taken to bolster the housing market.
The bulk of the Fed's revenue comes from the interest collected on the securities kept in the SOMA. Although the Fed does earn a profit on occasion when it buys and sells assets, the decisions to do so are not based on the possibility of making a profit from trading but rather on the necessities of monetary policy.