The Federal Reserve announced it will begin purchasing short-term government debt to help manage market liquidity levels and ensure the central bank maintains firm control over its system of interest rate targeting.
The technically oriented purchases will begin on December 12, the central bank said as part of the monetary policy announcement associated with its most recent meeting of the Federal Open Market Committee. When it starts buying, the initial round will total about $40 billion in Treasury bills.
The Fed said in a statement that its purchases “will remain elevated for a few months to offset the expected large increases in non-reserve liabilities in April,” adding that “after that, the pace of total purchases will likely slow significantly in line with expected seasonal patterns in Fed liabilities.”
Speaking after the central bank meeting, Fed Chair Jerome Powell said the purchase is “for the sole purpose of maintaining an ample supply of reserves over time, thereby supporting effective control of our monetary policy rate.” He added that “these issues are independent and have no implications for the direction of monetary policy.”
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The resumption of bond purchases that will once again expand the Fed’s balance sheet comes just after its decision to stop reducing its holdings starting at the beginning of this month.
Since 2022, the central bank has been allowing the Treasuries and mortgage bonds it holds to mature and not be replaced, in an effort called quantitative tightening, or QT.
The effort was aimed at draining oceans of liquidity that the Fed added during the COVID-19 pandemic to stabilize markets and provide stimulus at a time of near-zero rates. The QT brought the overall size of the Fed’s balance sheet from $9 trillion in 2022 to its current size of $6.6 trillion.
The Fed announced the end of QT in late October amid growing signs that liquidity had tightened enough to potentially complicate the central bank’s management of the federal funds rate, its main tool for achieving its inflation and employment goals.
In October, major money market rates began to rise as some financial companies tapped the Federal Reserve’s Permanent Repo Facility, which makes quick loans secured by Treasury bills and mortgage bonds. This foreshadowed a possible loss of control over the Fed’s benchmark interest rates, prompting the central bank to end QT.
With information from Reuters
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