The Fed Is Buying Billions in T-Bills. Just Don’t Call It QE.
The Federal Reserve’s most important policy move this past week wasn’t the cut in its policy interest rate but the resumption of its purchases of Treasury securities.
The official line is that the central bank’s new buys of $20 billion of Treasury bills a month doesn’t represent anything other than ordinary management of money-market conditions. Some veteran Fed watchers aren’t so sure. In particular, the central bank purchases seem part of a coordination with the Treasury to help fund the massive U.S. budget deficit and tamp down longer-term bond yields.
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Strategas’ Washington policy team, led by Daniel Clifton, estimates the Fed’s annual demand for $240 billion to $300 billion of T-bills would take up between 60% and 75% of the Treasury’s issuance of these short-term obligations.
So instead of maintaining interest rates to deal with rising and already high inflation, but which might possibly cause Trump to lose his mind again and start trying to fire Fed officials, the Fed is trying QE as a backdoor approach to to deal with long term rates. Except it isn’t working….
The Fed’s main policy tool, the federal-funds rate, hasn’t affected longer-term rates. The Treasury 10-year yield is higher, not lower, since the Fed started cutting its target rate by a total of 1.75 percentage points in September 2024, which Apollo Global Management’s chief economist, Torsten Sløk, calls a “mystery.” This is both contrary to previous Fed cutting cycles, starting in 2001, 2007, and 2019, and despite a decline in oil prices, which typically means lower yields, he says.
In other words, the Treasury and the Fed are working together to print funny money.
And it’s NOT a mystery why cutting rates hasn’t affected longer-term rates. It’s ECON101.
The Fed knows like everyone else in the world that the SCOTUS is about to strike down Trump’s tariffs. Meanwhile the enormous tax giveaway to the rich in the Big Ugly Bill, along with other disastrous Trump economic policies, STANDS. Which means huge new debt issuance and higher long term interest rates will ensue: the market doesn’t care what the Fed does with cutting rates or QE.
So there it is. The government is printing money, causing the value of the dollar to drop, thereby increasing inflation etc etc.
Bond investors don’t appreciate being left holding the bag. For new long dated Tbills, they will demand higher interest rates. Which will exacerbate housing problems since mortgage rates are pegged to 10 year treasuries. All this to appease the big baby president who thinks he can run the USA better than he can run his failed businesses.
We’ll be lucky if all this with the private debt markets fiasco doesn’t cause a crash. We’ll soon see….
Update: QE = Quantitative Easing. QT = Quantitative Tightening. As the diary image shows, the Fed has been doing QT since the pandemic. Now, due to baby Trump, QE is back.
