NEW YORK The Federal Reserve will buy bonds from a larger group of broker-dealers under a one-year pilot program meant to strengthen the U.S. central bank's direct involvement in financial markets.
The Federal Reserve Bank of New York, which carries out the Fed's monthly purchase of $85 billion in Treasury and mortgage bonds, now does direct business with 21 so-called primary dealers such as JPMorgan Chase & Co (JPM.N) and UBS AG UBSN.VX.
Under the pilot, the New York Fed said it will widen that supply chain so that up to five more smaller dealers can compete for the business, and so that it can augment "operational capacity and resiliency in its monetary policy operations."
The Fed bank outlined requirements for new broker dealers and invited them to apply for the pilot. Firms involved in the pilot will not automatically become primary dealers in the future, and would have to re-apply for any permanent program.
The Fed plans to announce the names of the new dealers later this year, and wants to run the program for about a year.
There is no connection between the length of the program and the future path of U.S. monetary policy, the New York Fed said in a statement. A spokesman said the move is not a sign that the 21 primary dealers are not meeting the Fed's needs in the bond market.
In an unprecedented drive to spur U.S. economic growth after the worst recession in decades, the Fed since late 2008 has bought some $2.5 trillion in longer-term bonds.
As it stands, the New York Fed's trading desk buys $45 billion in Treasuries and $40 billion in mortgage-backed securities per month under the third round of quantitative easing, dubbed QE3. Dealers submit quotes each day, after which the Fed outlines its trading activity.
The pilot program is being launched "to continue to explore the effectiveness and feasibility of expanding operations to a broader range of counterparties," the Fed bank said.
Eligible dealers must have net regulatory capital of between $1 million and $50 million, among other requirements.