The Fed Makes a Technical, not a Fundamental, Move

The Federal Reserve announced a move on Friday to alleviate pressures on the fed funds market. In a press release, the Federal Open Market Committee (FOMC) announced that it would buy short-term Treasurys beginning this week and lasting “…at least through Q2 2020.” The program would start with $60 billion of purchases per month, though that amount will be adjusted based on what the Fed believes is needed. The idea is to maintain bank reserves at levels “…at or above the level that prevailed in early September.” Given the recent confusion in funding markets, this move is positive — albeit a deep dive into monetary policy-making.

The Fed wants the market to realize this is a strictly technical action, and is not a return to quantitative easing (QE). How can we tell that? For one thing, the Fed is signaling its intention that the move is technical, demand-determined and not open-ended. It’s important to remember that part of how QE works is that it signals the central bank will do whatever it takes and to keep rates low and financial conditions easy for as long as it takes to achieve an objective. In this case, the Fed is attempting to bring its balance sheet to a level which it believes provides the proper amount of reserves for its actual monetary policy.

Separating the announcement of short-term Treasury purchases from an FOMC meeting implies it is monetary policy management, not monetary policy-making. In a sense, it’s the Fed recognizing that it had shrunk the balance sheet a bit too much and adjusting. That is proper monetary policy-making. The Fed and the markets are venturing into new waters here with the balance sheet as large as it has become, so it’s understandable that some participants would view this as a return to QE. I think that’s too big a claim; rather, the Fed is reacting to facts on the ground and taking the bull by the horns, which is good for the Fed’s credibility.

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