After ending the quantitative tightening program — the Federal Reserve has reversed course. The central bank now plans to resume buying Treasurys, a move that raised eyebrows across markets and rekindled debate over how “tight” policy really is.
During last week’s Federal Open Market Committee meeting, which also delivered another 25-basis-point cut to the federal funds rate, the Fed said reserve balances had dropped low enough to warrant renewed purchases of roughly $40 billion a month in short-term Treasury securities. According to the central bank’s announcement, these purchases are designed “to maintain an ample supply of reserves on an ongoing basis,” and are expected to taper by spring.
The goal is not to reignite stimulus, but to preserve smooth functioning in the banking system and short-term funding markets. The Financial Times noted that measures such as the secured overnight financing rate (SOFR) and the tri-party general collateral rate (TGCR) have shown increased volatility—something the Fed is eager to calm by adding liquidity in repo trading.
While the move may reassure markets, it stops short of aiding areas such as mortgage finance. In September, Pimco estimated that a halt to the Fed’s reduction of its mortgage-backed security holdings could narrow mortgage spreads by 20 to 30 basis points.
Instead, the Fed appears keen on keeping that part of the wind-down intact. As Wolf Richter reported on Wolf Street, the central bank plans to continue shrinking its MBS portfolio, replacing those assets with shorter-term Treasurys. That ongoing selling can lift bond yields and, by extension, raise borrowing costs for longer-term loans—including those tied to commercial real estate.
Some on Wall Street view the change more positively.
“More importantly, these purchases provide additional liquidity for markets, and in combination with rate cuts, also suggest the Fed is likely less worried about missing its inflation target,” Morgan Stanley wrote Monday, according to Business Insider.
Others see fragility behind the shift. Michael Burry, best known for “The Big Short,” cautioned on X that “if the U.S. banking system can’t function without $3+ trillion in reserves/life support from the Fed, that is not a sign of strength but a sign of fragility.”
He added that the Treasury’s recent tilt toward issuing more short-term Bills “to avoid driving 10-year rates up” makes the Fed’s decision to buy those same securities “awfully convenient.”
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