The Federal Reserve has effectively restarted a narrow form of quantitative easing by ordering ongoing Treasury bill purchases to keep reserves “ample,” even as officials frame the change as a technical adjustment in policy implementation.
In its monetary policy implementation statement, the Federal Open Market Committee directed the New York Fed’s Open Market Desk to increase System Open Market Account holdings of securities through purchases of Treasury bills. The directive authorizes purchases of bills and other Treasury securities with remaining maturities of three years or less, and it applies “until instructed otherwise.”
This front loaded buying program is being read by traders as a de facto restart of QE. Analyst Peter Schiff argued that “it won’t be long before the Fed expands and extends QE5 to longer dated maturities,” and he closed with “Got gold?,” a framing that connects the bill program directly to an inflation and hard asset narrative.
Underneath the QE branding, the official text is tightly specified. The Desk is told to buy Treasury bills and only extend into other Treasuries “if needed,” with no mention of longer duration bonds. All principal payments from existing Treasury holdings are to be rolled over at auction, preventing further Treasury runoff.
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In a further tilt toward the front end, all principal payments from the Fed’s agency securities are to be reinvested into Treasury bills, redirecting mortgage and agency cash flows into bills by design.
Rate settings have been adjusted around this balance sheet pivot but remain secondary in the market narrative. The Board of Governors voted unanimously to lower the interest rate paid on reserve balances to 3.65%.
The FOMC instructed the Desk to maintain the federal funds rate in a target range of 3.5 to 3.75%, locking in a 25 basis point band around the new reserve rate.
The standing facilities were reset to bracket that range. Standing overnight repurchase agreement operations are to be conducted at 3.75%, while standing overnight reverse repurchase operations remain at 3.5% with a per counterparty limit of $160 billion per day. In a related move, the primary credit rate at the discount window was cut by one quarter point to 3.75$, matching the top of the federal funds corridor and the repo rate.
Supporters of the “plumbing, not QE” view point to these details. The program is confined to bills and short paper, is justified explicitly as a tool to “maintain an ample level of reserves,” and does not reference any large scale asset purchase target or duration extension, unlike past QE rounds.
The Fed text also commits to updating the information as needed to reflect future FOMC or Board decisions, leaving the scale and pace of purchases unspecified for now.
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