The Fed’s QE—and the Claim of a Technical Adjustment

How a large balance-sheet expansion blurs the line between liquidity management and monetary accommodation

Last week, the Fed lowered its benchmark federal funds rate to 3.5–3.75 percent. This was expected. The more significant announcement, made almost as a passing gesture, was that the Fed would resume purchases of Treasury securities at the rate of $40 billion per month, with no specific end date. This action was lightly covered in the Fed statement, with the Chairman insisting that the resumption of Treasury purchases was reserve management—a technical action only. The move provides the banking system with an ample stock of reserves, enabling the Fed to conduct monetary policy through administered rates (interest on reserve balances, the repo rate, and the federal funds rate) without having to actively manage reserve balances.

It is surprising that the media failed to ask for more detail as to why restarting large open market purchases of U.S. Treasuries was not a restart of quantitative easing (QE), a monetary policy action that perhaps should have required a FOMC vote. The purchase of $40 billion per month of Treasury securities, if it continues through May, as Chairman Powell hinted, would be an annual increase of nearly 7 percent in bank reserves and if continued for all of 2026, would be an increase of 16 percent. Such increases will exceed projected GDP growth over these periods and are a substantial increase in liquidity for the financial system. Such purchases through May would equal 10 percent of the government’s deficit, and if continued through year-end, would equal almost 25 percent.

The Fed indicates that the purpose of these actions is to preclude possible market disruption around tax payment dates, such as April 15, or following large Treasury auctions when Treasury’s general account at the Fed increases and bank reserves decline, reducing market liquidity. However, these are temporary disruptions and can be managed effectively through temporary actions such as the Fed’s discount window or repo operations.

It is a delicate balance for the Fed to choose policy that provides for non-inflationary growth when the government is incurring large and persistent deficits and insisting that interest be kept low. The reopening of QE will, on the margin, increase demand for Treasury debt and suppress short-term rates. If, because of this action, long-term rates rise, the Fed will confront pressure to re-engage in yield curve control by buying long-term Treasuries to keep these rates from rising and slowing the economy. It’s a slippery slope the Fed is traversing, and the outcome is uncertain.

The Fed was designed knowing of the stress that fiscal authorities would place on monetary policy, and over the next year this stress will be acute. The nation’s debt will soon be $40 trillion, the deficit will remain close to $2 trillion, interest on the debt will approach $1 trillion, and all must be funded. At the same time, the demand for capital to meet the needs for AI and other private investment projects will also grow. The Fed will be under enormous pressure to use its ample reserves and administered rate framework to conveniently accommodate all needs. Unfortunately, since resources are limited, the risk to the economy is higher asset and price inflation and the misallocation of resources. The Fed’s most recent action has set the course for next year and beyond, and it is uncertain as to where it will end.