Is the money buying the money again? Don't Call Quantitative Facilitation.

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The Federal Reserve began buying the Treasury's short-term debt on Tuesday at an initial speed of $ 60 billion per month, but officials say these purchases are not similar to the bond purchase incentives released by the central bank between 2008 and 2014 to support it. the economy.

Q: What is the nutrition doing?

The Fed started buying Exchequer bills on October 15 at an initial $ 60 billion speed per month because officials found that last month's malfunction in very short foreign markets could lead to its $ 4 trillion portfolio to reduce too much.

Q: What happened in money markets last month?

A large transfer of money from banks to the government resulted in large payments of corporate taxes and Treasury auction settlements on 16 September. A mismatch in demand and supply of money has put pressure on a critical funding market where lending banks overnight through repurchase agreements, or “repo.”

This year, repo rates were generally not more than 10 percentage points above the mid-point of the benchmark federal funds rate, or about 2.2% in August and early September. Rates of repayments rose to 5% on 16 September.

Stronger pressure when repo started Wall Street firms began rolling over loans in early September 17, and the repo rate was rising as high as 10%. Even then banks refused to lend money, getting up large profits to keep their money.

The misleading rate led to a Fed co-financing rate was 2.3% – greater than its target range between 2% and 2.25%. This has not happened since the central bank began to settle out during the 2008 crisis.

The Fed began to bring money into cash markets on 17 September to draw down interest rates, and has since done overnight lending operations every business day to keep markets running smoothly.

Q: Even if the order Fed changed, did the central bank play any role in this volatility?

Yes, according to several dietary officers and external observers. To understand how it helps to review changes in the central bank's portfolio of assets, sometimes called a balance sheet, over the last two years.

Between 2008 and 2014, the Fed increased its portfolio to stimulate the economy. In 2017, central bank officials began to reduce their holdings by allowing them to be replaced by a single Treasury and mature mortgage securities.

When private investors buy bonds, they use cash, borrow funds or sell assets to raise funds to fund these purchases. The Fed is different. None of this is necessary because it can credit money electronically with the bond dealers' bank accounts which sell mortgage securities and Treasury securities. The nutrition gets the bonds, and the sellers' bank account increases the same as the value of the bonds. Banks keep deposits at the Fed, known as reserves, and when the Fed buys bonds from banks, their reserves increase the same amount.

When the FED began to reduce its balance sheet in 2017, it returned the process. As bond properties of the FED became maturity, the Fund's balances in the general Treasury account decreased; when the Exchequer issued a new security to private investors to replace the maturing one, the banks fund these purchases by reducing the reserves. Reserves reached $ 2.8 trillion in 2014 and were less than $ 1.4 trillion by mid-September.

Everyone knew that a time when scarce reserves grew enough that more banks could cut to lend money in overnight markets, but the experts inside and outside the Fed were not sure that the level. From the 2008 financial crisis, banks' demand for reserves has been significantly higher than previously due to changes in financial regulation and market structure.

Some nutrition officers thought that the reserves would not grow until they had fallen to less than $ 1.2 trillion based on surveys they had undertaken over the past year. But market volatility from September 16 to 17 suggested that the FED may have misjudged the demand for reserves and allowed it to fall too low.

Q: How do the purchases of the diet help Treasury securities to solve the problem?

If Fed officers decided that they had drained too much reserves from the system, the permanent solution was to add reserves to the system. The purchase of Treasury bonds will create the reserves now devised by the FED to implement its policy decisions.

Q: How many securities must the Nutrition purchase?

It depends on the extent to which a “buffer” of additional reserves is required to maintain the feed. The Fed said that the purchase of short-term Exchequer bills will continue in the second quarter of next year, although it is not committed to buying at a rate of $ 60 billion per month over the first month of purchase.

Fed officials have said they want to return reserves to a level that prevailed in early September, when they were nearly $ 1.5 trillion. Unlike the current nutrition repurchase market intervention, reserves would be in the region of $ 1.35 trillion.

Without the new purchases, lower reserves would continue to decrease as other liabilities on the balance sheet are growing. These liabilities include currency in circulation, the general Treasury account and certain services provided by the FED to foreign central banks.

For example, the Exchequer is refilling its general accounts after it was drawn down this summer when emergency measures were being used to stay below the debt limit. Growth in currency and general Treasury account could reduce reserves by another $ 150 billion this year.

While the sustenance is likely to exacerbate Exchequer bill purchases in 2020, it must continue to purchase smaller amounts of Treasurys – which are unlikely to exceed $ 15 billion per month – to be retained. up to currency growth.

Q: The Fed bought bonds to stimulate the economy between 2008 and 2014. Isn't this the same?

Not according to the nutrition. The central bank is very concerned that these purchases do not return to what is called quantitative facilitation, or QE.

Don't forget: the FED is buying a lot of security – more than most analysts who closely monitor bond markets. In addition to $ 60 billion in Treasury bills, the Fed has been buying up to $ 20 billion a month in a wider range of Treasury securities to replace maturing mortgage securities. By comparison, the Fed purchased $ 85 billion a month in Treasury securities and mortgage between December 2012 and October 2014 in its largest and final quantitative round.

There are three different ways to these purchases from QE.

Firstly, a QE was designed to prevent greater liquidity into the banking system than was required to build up more risk and boost growth. Nutrition is not being done this time. Instead, it is buying assets to fine tune the liability side of its balance sheet.

Secondly, Fed officials believed that QE was effective because the central bank bought long-term securities, reducing long-term rates and driving investors into stocks and bonds. The Fed's latest purchases are concentrated in short-term bills which officials believe are less motivated.

Third, QE had potentially powerful effects by telling investors about the broader objectives of nutrition to stimulate the economy, including by keeping rates lower for a longer period of time. longer than could be so. Nutrition is not being done this time and instead it has gone to the contrary – that the latest purchases are technical measures designed to have "any material implications for monetary policy position," propagation of diet published Friday.

“This is not a QE,” said Fed Chairman

Jerome Powell

last week. “This QE has no sense.”

Write Nick Timiraos at nick.timiraos@wsj.com

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