The Fed will need to grow its balance sheet ‘permanently,’ Morgan Stanley says

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The Federal Reserve’s asset purchases likely will total $315 billion over the next six months as it seeks to stabilize overnight funding markets and contain the movements of its target interest rate, according to projections from Morgan Stanley.

Those permanent moves will be necessary because the current temporary purchases likely won’t be enough to stabilize the market for overnight purchase agreements, or repos, the bank said.

Gerson said the Fed has a number of options for how it conducts the operations, with a standing repo, or repurchase, operation one possibility. However, Gerson said there are some issues with that option that could push the central bank away from it.

The Fed is now temporarily providing cash in exchange for safe assets like Treasurys and agency debt to keep its benchmark interest rate within a target range of 1.75% to 2%. During the repo market troubles last week, the fed funds rate broke its former barrier of 2% to 2.25%.

In its more permanent effort to rebuild reserves, the Fed is likely to purchase $35 billion to $40 billion a month in short-term Treasury bills, plus about $15 billion a month in various maturities “over the next 6 months and beyond,” Gerson wrote.


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