In some quarters there is a sense that quantitative easing (QE), the massive purchase of Treasury and other bonds by the Fed, is something embarrassing or disreputable – – an admission of failure, or an enabling of profligate financial behaviors. For months, pundits have been smacking their lips in anticipation of QE-like Fed actions, so they could say, “I told you so”. In particular, folks have predicted that the Fed would try to disguise the QE-ness of their action by giving some other, more innocuous name.
Here is how liquidity analyst Michael Howell humorously put it on Dec 7:
All leave has been cancelled in the Fed’s Acronym Department. They are hurriedly working over-time, desperately trying to think up an anodyne name to dub (inevitable) future liquidity interventions in time for the upcoming FOMC meeting. They plainly cannot use the politically-charged ‘QE’. We favor the term ‘Not-QE, QE’, but odds are it will be dubbed something like ‘Bank Reverse Management Operations’ (BRMO) or ‘Treasury Market Liquidity Operations’ (TMLO). The Fed could take a leaf from China’s playbook, since her Central Bank the PBoC, now uses a long list of monetary acronyms, such as MTL, RRRs, RRPs and now ORRPs, probably to hide what policy makers are really doing.
And indeed, the Fed announced on Dec 10 that it would purchase $40 billion in T-bills in the very near term, with more purchases to follow.
But is this really (the unseemly) QE of years past? Cooler heads argue that no, it is not. Traditional QE has focused on longer-term securities (e.g. T-bonds or mortgage securities with maturities perhaps 5-10 years), in an effort to lower longer-term rates. Classically, QE was undertaken when the broader economy was in crisis, and short-term rates had already been lowered to near zero, so they could not be lowered much further.
But the current purchases are all very short-term (3 months or less). So, this is a swap of cash for almost-cash. Thus, I am on the side of those saying this is not quite QE. Almost, but not quite.
The reason given for undertaking these purchases is pretty straightforward, though it would take more time to explicate it that I want to take right now. I hope to return to this topic of system liquidity in a future post.Briefly, the whole financial system runs on constant refinancing/rolling over of debt. A key mechanism for this is the “repo” market for collateralized lending, and a key parameter for the health of that market is the level of “reserves” in the banking system. Those reserves, for various reasons, have been getting so low that the system is getting in danger of seizing up, like a machine with insufficient lubrication. These recent Fed purchases directly ease that situation. This management of short-term liquidity does differ from classic purchases of long-term securities.
The reason I am not comfortable saying robustly, “No, this is not all QE” is that the government has taken to funding its ginormous ongoing peacetime deficit with mainly short-term debt. It is that ginormous short-term debt issuance which has contributed to the liquidity squeeze. And so, these ultra-short term T-bill purchases are to some extent monetizing the deficit. Deficit monetization in theory differs from QE, at least in stated goals, but in practice the boundaries are blurry.
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