Fed’s plan to buy Treasury bills could be an expensive ordeal

Galtero Lara
Octubre 12, 2019

In addition, the Federal Reserve will conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation.

But the size of the monthly Treasury purchases will be adjusted as the Fed learns more about how much liquidity is needed in the banking system.

It also will continue through at least January the recently implemented steps to inject funds into the USA markets on a daily basis. "It is meant to ensure in an ample reserves regime that we are able to set the fed funds rate in the target range that we set".

Earlier this week, Jerome Powell indicated that the Fed would start to expand its balance sheet but insisted the policy should not be considered a new phase of quantitative easing because it was not aimed at generally loosening the stance of monetary policy or boosting economic growth.

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The U.S. central bank on Friday was at pains to emphasize that its new balance sheet operations were not a response to that call, and are entirely different from the trillions of dollars of Treasuries and mortgage-backed securities purchases it made during and after the financial crisis.

The Fed will purchase Treasury bills through at least Q2 of next year to maintain "ample reserve balances at or above the level that prevailed in early September 2019".

The 10-year Treasury falls, pushing yield up nearly 7 basis points to 1.74%; (TLT -1.3%), (TBT +2.6%).

Across maturities, yields dipped modestly, but remained up between 5 and 10 basis points on the day.

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