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Financial markets

Fed Preparing for Rapid Return to Bond Purchases Amid Financial System Stress

Strategic Insights

— 1 min read

The US Federal Reserve is set to restore net bond purchases to stabilize the financial system, with the possibility of buying $35bn of US Treasury debt per month as early as January. This move is part of a concerted effort to address liquidity issues, following a sharp increase in short-term debt sales by the US Treasury. Critics argue that this move will fuel further inflation and exacerbate the nation's fiscal deficits.

Key Takeaways:

  • The Fed is expected to start buying $35bn of US Treasury debt per month, with some analysts predicting a total of $150bn in purchases to stabilize the money markets.
  • The move is aimed at addressing liquidity issues, with the Fed stating that money market rates have become unstable.
  • Critics argue that this move will fuel further inflation and exacerbate the nation's fiscal deficits, with the current general government deficit standing at 7.4pc of GDP.
  • The Fed's balance sheet has grown to $6.6tn, up from $800bn since the start of quantitative easing in 2008.
  • The ratio of reserves to bank assets remains high, categorised as "abundant" by the New York Fed, despite banks reporting bumper earnings.
  • The move is seen as a step towards fiscal dominance, with the Fed being accused of aiding and abetting the monetisation of America's deficits.

Statistics:

  • The US Federal Reserve balance sheet stands at $6.6tn, or 22pc of GDP.
  • The ratio of reserves to bank assets is 12pc, categorised as "abundant" by the New York Fed.
  • Money market rates have become unstable, with the spread on the secured overnight financing rate jumping to 16 basis points above the interest paid by the Fed on bank reserves.
  • The US Treasury has issued a record amount of short-term T-bills.
  • The International Monetary Fund forecasts that the US general government deficit will rise to 8pc of GDP in the late 2020s.

Sources:

  • Tom Williams, "Fed Preparing for Rapid Return to Bond Purchases Amid Financial System Stress", article from _The Sunday Telegraph_, no date.
  • Bear Stearns, "Bear Stearns Special Situation Alert", 29 March 1993.
  • _The Times_, "Jerome Powell Dismisses The Chances Of Another Rate Cuts This Year", 10 November 1994.
  • International Monetary Fund, Fiscal Monitor, October 1995, _The future of the global economy_ - The.
  • _Bloomberg_, "Bernie Lo Claims zero- rate HAt Under Rate-c3(ZJuly"}
  • Johnson, Bernard, "You Always Hurt the One You Love: Central Banks and the Murder of Capitalism", chapter 4, p. 175-189.

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