New York Fed's 2023 Open Market Operations Report summarizes QT-related content

** New York Fed's 2023 Open Market Operations Report summarizes QT-related content and key Appendix parts of the text

Asset-related
- Redemption Cap first announced at FOMC in May 2022. (60 billion government bonds, 35 billion MBS total 95 billion)

debt-related
- Nominal GDP is expected to rise gradually. Real GDP and PCE price long-term median are 1.9%/2.0%, respectively. Eventually, the long-term nominal GDP median is estimated at 3.9%
- Estimated by dividing into two scenarios because the scale of the reserve is uncertain in the long run. Each scenario estimates that the long-term reserve scale will reach 10%/8%
- TGA rises to $75 billion at the end of Q1, remains similar in Q2. TGA balance expected to rise to $108 billion along with nominal GDP rise going into Q3-4
- Reverse repo balance expected to decline by the end of 2024; rate of decline will be similar to now
- The Fed's net interest income is expected to shift (+) from next year. While interest rate cuts have reduced the burden of interest payments, bond assets reinvested after maturity repayment have been replaced by high interest rates

<2 scenarios>

1️⃣High Ji-jun scenario (newly added)
- Projected to rise slightly above $3.0 trillion in early 2026

Nominal GDP 12%: portpolio slow phase (QT deceleration)
- H1 2024-early 2025. Reduced to half the redemption cap (30 billion MBS 17.5 billion in government bonds, a total of 47.5 billion, half of the previous 95 billion). Expected to reinvest all in government bonds. Securities held are expected to fall by 45 billion on average per month
* FYI AVERAGE $75 BILLION REDUCED PERMANENTLY AT THE TIME OF QT IN THE CURRENT CYCLE

Nominal GDP 11%: Portpolio maintenance phase (QT down completely)
- Early 2025~early 2026
- At this time, the holding securities are expected to be around $6.5 trillion (22% of nominal GDP)

Nominal GDP 10%: Portpolio growth (net purchase of bonds) phase
- Early 2026~

2️⃣ Low Ji-jun scenario
- Projected to fall below $2.5 trillion in mid-2026

Nominal GDP 10%: portpolio slow phase (QT deceleration)
- Early to mid-2025

Nominal GDP 9%: Portpolio maintenance phase (QT down completely)
- Mid-2025 to mid-2026
- At this time, the holding securities are expected to be around $6.0 trillion (20% of nominal GDP)

Nominal GDP 8%: Portpolio growth (net purchase of bonds) phase
- mid-2026

Both scenarios
Portpolio slow phase: A decrease in the reserve requirement is expected. However, a decrease in the balance of reverse repo and an increase in deferred assets (financial reserves for accumulated deficits) will partially offset the increase
Portpolio Maintenance Phase: Increased non-standards and decreased deferred assets (financial reserves for accumulated deficits) lead to a decrease in reserve requirements

Portfolio composition related

In the port folio slow phase
1) High Ji-jun Scenario
-Agency MBS decreases to 34% ➡ 10% ️ of total securities held
2) Low Ji-jun Scenario
-Agency MBS decreases to 34% of total securities held ➡ 11% ️

portfolio maintenance & growth 국면
- The principal of agency securities is reinvested into government bonds
- The principal of government bonds is reinvested in new government bonds

When the portfolio growth phase begins, the reserve mgmt purchase is only implemented on government bonds (gradually increasing the proportion of government bond holdings)