What is the System Open Market Account - SOMA
The System Open Market Account (SOMA) is managed by the Federal Reserve Bank and contains assets acquired through operations in the open market. The assets in the SOMA serve as a management tool for the Federal Reserve's assets, a store of liquidity to be used in an emergency event where the need for liquidity arises and as collateral for the liabilities on the Federal Reserve's balance sheet, such as U.S. dollars in circulation.
Assets in the SOMA include both domestic securities and foreign currency portfolios of the Federal Reserve. The domestic portion consists of U.S. dollar-denominated Treasuries. The foreign currency portion consists of a range of different investments denominated in either euros or Japanese yen.
BREAKING DOWN System Open Market Account - SOMA
System Open Market Account (SOMA) transactions are executed by the Open Market Desk of the Federal Reserve Bank of New York, which is commonly referred to as the New York Fed. Policy decisions regarding such transactions are made by the Federal Reserve Open Market Committee (FOMC).
Conducting Monetary Policy
A primary responsibility of the Federal Reserve is to establish monetary policy for the United States and to execute transactions to carry out that policy. When the Fed sets a target for the Federal Funds Rate at which banks lend to each other, it executes purchases and sales of the securities in the SOMA to increase or decrease liquidity in the system. The Fed buys securities to add liquidity to the system and sells securities to reduce liquidity.
Such transactions can be either outright purchases and sales, or short-term transactions that are known as repurchase agreements (repos) and reverse repos. Repos and reverse repos are commonly done to adjust the amount of liquidity in the system, which changes daily due to commercial transactions, rather than to make a major liquidity adjustment due to a policy change.
Large-Scale Asset Purchase Program
The Fed has historically bought and sold short-term U.S. Treasury bills to impact short-term interest rates. Between October 2008 and October 2014, in the aftermath of the financial market collapse, the Fed also purchased substantial amounts of long-term U.S. Treasury bonds to push long-term interest rates lower, with the goal of helping to stimulate the U.S. economy.
The Fed also purchased large quantities of mortgage-based securities from government-sponsored entities Fannie Mae, Freddie Mac and Ginnie Mae to support the housing market and increase funding for mortgage lending.
The Fed releases a weekly statistical report known as H.4.1, which details the balances it holds.
The interest paid on the securities held in the SOMA provides the majority of the Fed's income. While the Fed sometimes makes money by buying and selling securities, those transactions are dictated by monetary policy requirements rather than potential trading gains.