🔥 Is the Fed launching the printing press?

➠ The Fed reduced the rate by 25 bps.

➠ The main event – #QT (reducing the Fed's balance) was halted from December 1st.

➠ A new regime is being activated – "Reserve Management Purchases", treasury purchases for reserve management. The Fed will start adding short-term US government bonds to its portfolio first.

➠ The first step – about $40b on US government bonds over 30 days.

➠ The start of purchases – December 12th, the schedule of operations should be published on December 11th.

➠ Previously, the Fed did not buy new bonds when old ones were repaid – the money left the financial system. Now, the Fed will start buying new government bonds for the same amount immediately when treasuries are repaid – the money stays in the system.

➠ Repayments on MBS (mortgage securities) will also start being transferred to treasuries – the Fed's portfolio will become more flexible.

➠ In parallel, the Fed is expanding overnight repos: liquidity is ready to be provided in the format of “full allotment” (as much as needed against collateral).

➠ What the Fed usually means by #QE: large asset purchases (often treasuries and MBS) to ease financial conditions and support the economy.

➠ Why the word QE is avoided now: the official goal is different – to "technically" maintain sufficient reserves and normal short-term rates, NOT to launch an anti-crisis stimulus.

➠ But in essence, the mechanism is similar to QE – the Fed buys government bonds, reserves are replenished/the balance grows, and liquidity increases.

➠ The scale is not yet like in classic QE: $40b – this is about 0.6% of the balance (~$6.5T). Even if this is done for a year, it's not a "return to 2020".

➠ At the same time, there are active discussions on the internet about whether the Fed's desire to switch to QE just 10 days after the end of QT may indicate serious problems in the economy.

💥 FedWatch: In January, the Fed will leave the interest rate unchanged with a probability of 77.9%.