The New York Fed is authorized and directed by the Federal Open Market Committee (FOMC)
to manage foreign currency reserves held in the System Open Market Account (SOMA)
. Additionally, in its capacity as fiscal agent of the United States, the New York Fed is directed by the U.S. Treasury to manage the foreign currency reserves held by the Exchange Stabilization Fund (ESF)
The Federal Reserve Act authorizes open market transactions, including foreign exchange transactions. The FOMC has authorized and directed the New York Fed to execute standalone spot and forward foreign exchange transactions in the resultant foreign currencies, to hold balances in those currencies, and to invest such foreign currency holdings, while maintaining sufficient liquidity to support foreign exchange interventions, as directed by the U.S. Treasury. The New York Fed conducts such operations pursuant to direction from the Federal Reserve's Federal Open Market Committee (FOMC).
SOMA and ESF foreign currency reserves are currently held in euros and Japanese yen and are passively managed. These assets are invested, as directed, in various instruments that have high degrees of liquidity and safety to achieve the policy directives of the Federal Reserve and the U.S. Treasury. The SOMA and the ESF foreign currency reserves are managed so that their risk and return characteristics match as closely as possible. To the extent practical, investments are split proportionately between the SOMA and ESF holdings.
Liquidity is the primary investment objective of the foreign reserves portfolio. As such, foreign currency reserves are invested to ensure that adequate liquidity is maintained to meet potential needs. Maintaining a high degree of safety is also essential, but is a secondary objective for the purposes of portfolio management. Lastly, efforts to improve portfolio returns are considered only after the liquidity and safety objectives have been met.
The foreign reserves portfolios are passively managed, with purchases and sales conducted to meet an asset allocation target; the target is determined based on the portfolio’s broader goals of maximizing return subject to the liquidity and safety objectives. To that end, the manager of the SOMA and the ESF foreign reserves portfolios consults regularly with the FOMC and the U.S. Treasury regarding the disposition of investments and the status of the reserves portfolios.
The SOMA and ESF portfolios hold assets denominated in euros and Japanese yen. A significant portion of the U.S. monetary authorities' foreign currency reserves is invested on an outright basis in government-backed securities. Foreign currency reserves may also be held on deposit at the Bank for International Settlements and at foreign central banks, such as the Deutsche Bundesbank, the Banque de France, and the Bank of Japan. Transactions are conducted with official institutions and eligible private-sector counterparties.