Fed signals a return to active balance-sheet support with Treasury bill purchases
Renovations continue at the Federal Reserve Board building in Washington, D.C. (photo: Reuters)
Summary
- The Fed will begin buying short-dated government securities to manage market liquidity and preserve control over its policy rate.
- The initial program targets Treasury bills and will start on December 12, with about $40 billion in the first round.
- This import of liquidity is technical in nature and designed to maintain the Federal Reserve’s intended interest-rate path.
The Federal Reserve said on Wednesday that it will restart purchases of short-term government securities to help maintain sufficient liquidity in money markets and to reinforce its control over the federal funds rate target. The purchases are described as technical operations focused on liquidity management rather than a broad shift in policy stance.
The inaugural phase of Treasury bill purchases will begin December 12. The Fed characterized the first round as elevated for a few months before tapering purchases significantly thereafter.
This move follows the Fed’s decision to end its balance-sheet shrinkage program, QT, which had been in place since 2022. QT involved allowing Treasuries and mortgage-backed securities to mature without reinvestment, reducing the balance sheet from about $9 trillion to roughly $6.6 trillion. The end of QT was announced in late October, amid signs that liquidity conditions had become tight enough to threaten the smooth functioning of the federal funds rate.
In the months leading up to the end of QT, money-market rates rose and the Fed’s Standing Repo Facility saw increased use as institutions borrowed against Treasury and mortgage securities. The Fed framed the end of QT as a return to a level of liquidity deemed ample enough to support the funds rate target while still accommodating normal market volatility.
Analysts had expected a quick shift back to asset purchases, with some predicting a start early next year. The current plan appears aimed at bolstering liquidity as year-end liquidity pressures can spike market volatility.
New York Fed President John Williams said that determining when reserves are at an ample level is inherently uncertain. He noted that once reserves reach a sufficient level, the Fed will begin a gradual asset-purchase program, emphasizing that this does not signal a change in the policy stance.
Roberto Perli of the New York Fed, who oversees policy implementation, suggested that the expanded purchases could begin relatively soon based on current conditions.
Reporting by Michael S. Derby; Editing by Andrea Ricci
This article reflects the Fed’s objective to ensure orderly market functioning and a steady path for interest rates amid evolving liquidity conditions."
