The Fed Only Lasted 12 Days Before Restarting QE

Quick Overview

The Federal Reserve restarted Quantitative Easing (QE) just 12 days after announcing the end of Quantitative Tightening (QT) on December 1st, by beginning net purchases of Treasury bills starting December 12th under the guise of reserve management.

Key Points: The Fed ended QT on December 1st, but on December 10th announced new purchases starting December 12th, meaning only 12 days passed between the two policy phases. The new policy involves purchasing Treasury bills and potentially other Treasury securities with maturities of 3 years or less to maintain an ample level of reserves, amounting to about $40 billion of net Treasury bill purchases for the first 30 days. Implementation notes revealed the Fed will increase System Open Market Account holdings of securities through purchases, a move described as a shock to the market, reversing the previous goal of draining reserves. The Fed continues to drain mortgage-backed securities (MBS) from its balance sheet (QT for mortgages) but reinvests principal payments from MBS and maturing Treasuries into Treasury bills (QE back into T-bills). The speaker argues that purchasing US government debt, regardless of whether it is labeled 'reserve management' or QE, results in money printing and expanding the money supply. The M2 money supply growth rate, which had briefly turned negative during QT, is now growing at an annual rate of 4.4%, which fuels monetary inflation. Unlike the 2019 reserve management purchases which were strictly T-bills, this new action extends flexibility to purchase up to three-year notes, covering a larger area of the yield curve.

Context: The discussion centers on the recent policy shift by the Federal Reserve regarding its balance sheet operations, specifically the transition from Quantitative Tightening (QT), which involved reducing asset holdings since 2022, back to asset purchases, which the speaker equates to Quantitative Easing (QE). The context is set by the Fed's announcement that QT would cease on December 1st, followed quickly by a new announcement on December 10th detailing the resumption of purchases starting December 12th, which surprised many observers who anticipated a much longer pause.