At its latest policy meeting, the Federal Reserve delivered a widely expected interest rate cut, but the more significant policy development was its move to resume purchases of Treasury securities.
The central bank will buy roughly $20 billion in Treasury bills each month, with the aim of ensuring reserve balances grow in line with nominal activity and of preserving the “ample reserves” floor system used to control short-term interest rates.
The move reflects the Fed’s view that reserve balances had fallen near the lower bound of what it considers ample, raising the risk of stress in funding markets. Coming on the heels of the formal end of quantitative tightening, the purchases are designed to reduce volatility in overnight rates rather than provide broad macroeconomic stimulus.
Fed Chair Jerome Powell said these Reserve Management Purchases (RMPs) are intended to prevent a tightening in short-term liquidity. Unlike earlier bond buying programs, commonly called quantitative easing (QE), the RMPs come with an interesting twist. As the Fed noted in its statement:
“These reserve management purchases (RMPs) will be sized to accommodate projected trend growth in the demand for Federal Reserve liabilities as well as seasonal fluctuations, such as those driven by tax payment dates.”
The Fed’s T-bill purchases will allow the Treasury’s debt managers to boost T-bills’ share of total borrowing to 30 per cent, up from 22 per cent, reducing the size of note and bond auctions. In addition, the Treasury has stepped up repurchases of less actively traded (“off-the-run”) notes and bonds, with the aim of improving market liquidity, to $150 billion annually.
In the past, the Treasury has conducted bond buyback programs. During the Clinton administration, when Treasury issuance was declining, it implemented a bond buyback program of off-the-run bonds to support market liquidity and enable greater issuance of on-the-run bonds. That program was essentially a portfolio rebalancing exercise. Today, the Fed is using its balance sheet to support the Treasury market, prompting some observers to see it as a way for the central bank to help support the Treasury to fund the massive U.S. budget deficit and tamp down longer-term bond yields.
In addition to these purchases, the Fed will buy another $40 billion in T-bills each month through the reinvestment of monthly paydowns from its $2 trillion in agency mortgage-backed securities holdings. Taken together, the Fed’s annual demand for $240 billion to $300 billion in T-bills could absorb 60 per cent to 75 per cent of the Treasury’s issuance of these short-term obligations.
The focus on short-term T-bill issuance and the buybacks of longer-dated securities has been seen by some analysts as an attempt to lean against the market.
A key difference between this program and QE is that the Fed’s purchases will fluctuate based on the calendar. Money-market stress tends to spike around predictable events—quarter-end, year-end, and especially tax season in April, when the Treasury drains cash from the banking system just as everyone pays the IRS. This is a departure from previous QE campaigns, where the Fed announced a total amount of purchases and executed them at a steady pace, regardless of seasonality.
The central bank insists RMPs are an operational tool, not a monetary policy measure. But, as TD notes, “at some point, the line between operational and monetary policy decisions starts to blur.”
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Canada’s housing agencies are tangled in overlapping roles, creating duplication and unclear accountability — but it doesn’t have to be this way. Our latest Housing Affordability Watch explores how clarifying responsibilities between CMHC, HIC, and BCH could strengthen the National Housing Strategy and improve program delivery.
Read it here: Untangling Agency Roles to Improve Canada’s National Housing Strategy
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.
