What if? A Counterfactual SOMA Portfolio

The Federal Open Market Committee (FOMC) has actively used changes in the size and composition of the System Open Market Account (SOMA) portfolio to implement monetary policy in recent years. These actions have been intended to promote the Committee?s mandate to foster maximum employment and price stability but, as discussed in a prior post, have also generated high levels of portfolio income, contributing in turn to elevated remittances to the U.S. Treasury. In the future, as the accommodative stance of monetary policy is eventually normalized, net portfolio income is likely to decline from these high levels and may dip below pre-crisis averages for a time, potentially contributing to a suspension in remittances (Carpenter et al. 2013). But what would the path of the portfolio and income look like had these unconventional balance sheet actions not been taken? In this post, we conduct a counterfactual exercise to explore such a scenario.