Fed to Expand Balance Sheet

The Fed restarts QE for technical reasons.

The Federal Reserve has stated it will resume asset purchases with newly created digital money, albeit on a smaller scale that targets only the short end of the yield curve, a departure from the scale of QE that began in 2020 but QE nevertheless.

In past QE episodes the Fed targeted both long-end duration securities as well as mortgage-backed securities on a more aggressive scale.

The Problem

In 2022 the Fed began quantitative tightening to drain reserves from the balance sheet, eventually causing reserves in the banking system to dry up enough that short-term funding rates drifted higher. That caused a spike in repo facilities usage. The Fed does not want to lose control of the Fed funds rate as we go into year end and 2026.

The Fed has stated it's aim to balance the risks posed by structurally higher inflation at the same time as a deteriorating job market. It has all but admitted that we are in a state of stagflation. For now it has chosen to ease conditions but signals fewer rate cuts in 2026.

References & Further Reading

Fed says it will start technical buying of Treasury bills to manage market liquidity Reuters