QE, or Not QE? Impact of Fed Bond-Buying Will Depend on Treasury
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The Federal Reserve insists itsplanned hoovering-up of Treasury securities is a “technical” measure that isn’t quantitative easing and won’t meaningfully impact the economy. But that may depend on how the Treasury Department responds to the central bank’s plan.
If the Treasury reacts by stepping up its issuance of Treasury bills and cutting back on sales of longer-dated securities, that would tend to put downward pressure on long-term interest rates — which is exactly what the Fed’s crisis-era QE programs were intended to do.
But if the Treasury keeps its issuance plans the way they are now, then the Fed’s massive buying risks squeezes in the bills market that could push up prices.
“The impact the Fed’s purchases have is dependent on what the Treasury Department does with issuance,’’ Drew Matus, chief market strategist for MetLife Investment Management, said in an email.
“If they boost bill issuance and cut note and bond issuance, it could have a stimulative effect on the economy,’’ said Matus, who once worked on the New York Fed’s open market desk that implements the central bank’s interest-rate intentions.
The interplay between the politically-independent Fed and Treasury highlights the difficulties of carrying out monetary policy in a world where rates are low and central banks are more dependent on asset purchases to manage their economies.
A Treasury spokesman declined to comment on what the department intends to do. The Treasury is slated to announce its quarterly refunding plans on Oct. 30, a few hours before the Fed concludes a policy meeting.
The Fed said on Friday that it will begin buying $60 billion of Treasury bills per month to improve its control over the benchmark interest rate it uses to guide monetary policy after turmoil rocked money markets in September.
Purchases will continue “at least into the second quarter of next year,’’ the central bank said in a statement.
“If you stretch purchases into the second quarter, that amounts to at least $400 billion,’’ said Thomas Costerg, senior U.S. economist at Pictet Wealth Management in Geneva.
In foreshadowing the Fed’s decision earlier this week, Chairman Jerome Powell repeatedly maintained that any planned securities buying would not be a resumption of QE.
“In no sense is this QE,’’ Powell told the National Association for Business Economics conference in Denver on Oct. 8.
Under quantitative easing, the Fed bought bonds to lower long-term borrowing costs and boost stock prices and the economy during and after the financial crisis.
Powell argued that the Federal Open Market Committee was not out to spur the economy by resuming growth of its balance sheet, as was the case under its crisis-era buying campaign.
Instead, it is responding to last month’s strains in short-term money markets by supplying more liquidity in the form of bank reserves.
As if to hammer that message home, the Fed is creating those reserves through purchases of bills with a maturity of one year or less, rather than buying longer-term Treasury debt, as it did under QE.
“The committee’s apparent concern with how the public would perceive today’s announcement seems heightened enough to conclude that it was a primary consideration in deciding which sector of the Treasury market they would purchase,’’ Michael Feroli, chief U.S. economist for JPMorgan Chase & Co., said in a note on Friday.
Some of that concern may also be political. President Donald Trump has repeatedly accused the Fed of keeping monetary policy too tight and at various points has urged it to resume asset purchases.
Some Fed watchers concur with Powell’s assessment of what the Fed is up to.
“This is not QE or even QE lite,’’ Krishna Guha, vice chairman of Evercore ISI, said in an Oct. 8 note. “The central bank is responding to market demand for central bank reserves with minimal duration as it did before 2007.’’
The September scramble for reserves was triggered by a combination of corporate tax payments and the settlement of Treasury debt sales that temporarily sent the rate on overnight securities repurchase agreements as high as 10%.
Wrightson ICAP LLC chief economist Lou Crandall said that a lot depends on how the Treasury responds.
“If they cut coupon issuance, then guess what, this is QE,’’ he said. If the Treasury doesn’t, then it runs the risk of spawning turmoil in the bills market.
“I don’t know which of their allergies give them the worst rash,’’ he said in discussing the Treasury’s options.
— With assistance by Saleha Mohsin, and Christopher Condon
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