Features

The Federal Reserve has a "plumbing problem"

The US Federal Reserve has started purchasing Treasury bonds with printed money to clear short-term blockages in the financial system.

US Federal Reserve building © iStockphotos
The US Federal Reserve is printing money again

The US Federal Reserve has started purchasing Treasury bonds with printed money. But don't call it quantitative easing (QE), says Jeanna Smialek in The New York Times. It will buy $60bn of short-dated debt a month.

After the crisis the Fed bought $4trn in assets with printed money in three rounds of QE. It began to unwind the programme in 2017 as the economy improved. Yet this "quantitative tightening" has created an unexpected shortage of dollars in money markets. That caused rates to spike as high as 10% last month in the "repo" market, where banks go for short-term loans. Some have billed the latest round of purchases as "QE4", the fourth round of easing since 2008, notes Matthew Klein for Barron's magazine. That is misleading. There is a complex and ever-changing relationship between the size of the Fed's balance sheet, how many dollars are sloshing around the system and prevailing interest rates in the real economy. Getting the mix right is "more art than science".

It doesn't help that the Fed tries to control the size of its balance sheet rather than letting it be determined by market demand for cash. The key point for investors is that while full-on QE is intended to ease lending conditions and stimulate the economy, the latest measures have a far more limited objective: to clear short-term blockages in the financial system.

The Fed had to act, says Matt Egan on CNN. Sustained pressure in repo markets could cause it to lose control of short-term borrowing rates altogether "a problem because that's precisely how the Fed influences the economy". Officials say the new purchases are just a matter of fixing the plumbing. That is probably true. "But as many homeowners know, even plumbing problems can turn into bigger ones."

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
US election: stockmarkets don’t care who’s in the White House
US stockmarkets

US election: stockmarkets don’t care who’s in the White House

The economic cycle and America's central bank have a much bigger effect on long-term stockmarket returns than whether Democrats or Republicans are in …
23 Oct 2020
What the race for the White House means for your money
US election

What the race for the White House means for your money

American voters are about to decide whether Donald Trump or Joe Biden will take the oath of office on 20 January. Matthew Partridge explains how vario…
15 Oct 2020
The riskiest election in US history
US election

The riskiest election in US history

Donald Trump’s illness has rattled markets as investors try to understand the implications of an incapacitated American president or a bitterly contes…
8 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020