The Fed has reversed a long-standing balance sheet tightening phase with its recent decision to expand its balance sheet—a move that has largely flown under the news radar.
Indeed, the Fed didn’t label its actions as quantitative easing (QE), allowing it to escape closer scrutiny from retail investors and the mainstream financial media. But make no mistake, the policy reversal will almost certainly have profound consequences on the intermediate-term financial market outlook.
The decision was announced earlier this month after the Fed cut its benchmark rate by 25 basis points to a target range of 3.5%-3.75%. It further said it would support the Treasury complex through direct purchases of short-term T-bills, starting with about $40 billion monthly initially, with plans to adjust along the way.
The Fed was careful to avoid calling it QE, instead referring to it as “reserve management purchases” (RMPs), pitching it as a means of ensuring ample bank reserves and smooth money market functioning.
Specifically, Fed officials have stated that its measures are intended as “technical adjustments to manage liquidity, not a broad stimulus effort like past QE,” focusing on short-term debt rather than long-term bonds. The effect is that it will inject cash into the banking system, increase liquidity and potentially ease borrowing costs while the Fed cuts interest rates.
However, many analysts aren’t buying the idea that this policy decision doesn’t represent QE, instead seeing it as a backdoor version of the same.
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Indeed, some analysts see the intervention as coordination with the Treasury to help fund the federal government’s massive (and growing) budget deficit. Others see it as the result of a struggling domestic labor market, while still others view the move as resulting from reserve scarcity as an abundance of government debt on bank balance sheets, along with a scarcity of cash, caused overnight funding stress, as seen via recent increases in repo facility use.
On the latter score, Reuters reported that the Fed’s Standing Repo Facility lent a total of over $50 billion earlier this fall to certain financial firms in what was the highest-ever usage since the tool was established in 2021 to provide fast loans collateralized with Treasury or mortgage bonds.
Commenting on this phenomenon, ZeroHedge wrote: “Signs of renewed short-term funding stress have begun to surface across U.S. money markets. Nothing approaching the 2019 spike has yet occurred (see chart below), but the tremors are unmistakable.”
Source: Bloomberg Finance
In this week’s issue of Barron’s, Randall Forsyth commented on the low-key manner in which Fed officials are treating the multi-billion-dollar Treasury purchasing scheme, which they claim is nothing more than “ordinary management of money-market conditions” and an anticipation of short-term liquidity tightening ahead of the April 15 tax deadline. Yet a number of top Wall Street securities analysts, Forsyth notes, are asking why the Fed would need to intervene this far ahead of tax season?
He further quoted TS Lombard’s chief U.S. economist, Steven Blitz, who thinks the central bank’s latest actions will “ultimately prove to be inflationary,” while other pundits see the recent strength in gold, silver and equities in general as an indication that the market is already anticipating another round of inflation.
For the most part, I agree with this assessment. And on that score, I think an argument can be made that the Fed’s decision to revive what essentially amounts to QE is the result of (among other things) this year’s tariff and trade policy shifts, which have disrupted global supply chains and put undue pressure on the financial system.
Ironically, however, the inflationary aspect of these supply chain shifts is likely to be further exacerbated through the Fed’s intervention. And while that may ultimately prove to be bad news for consumers, it should be mostly beneficial for investors.
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