Why is the $40 billion RMP considered to be a form of invisible quantitative easing?

1. What is the $40 billion short-term bond purchase program?

Official name: RMP (Reserve Management Purchases), which means 'Reserve Management Purchases'.

The Federal Reserve announced that it will spend approximately $40 billion each month purchasing short-term government bonds (generally referring to bonds with maturities of less than one year) in the open market.

When the Federal Reserve buys bonds, it is essentially handing over dollar reserves to the market, expanding the Federal Reserve's balance sheet and increasing the amount of money in the market.

2. Why is this not considered quantitative easing (QE) by the Federal Reserve?

The Federal Reserve refers to it as repo operations and liquidity management, primarily aimed at maintaining short-term interest rates within a target range and ensuring sufficient liquidity in the financial system.

Traditional QE typically involves purchasing long-term government bonds with the aim of lowering long-term interest rates, encouraging corporate borrowing, and directly stimulating the economy.

This implementation through RMP (repo facility tool) involves purchasing short-term government bonds. The goal is to replenish the reserves of the banking system to ensure smooth operation of the banking system, rather than to lower long-term interest rates.

The Federal Reserve believes that this is like fixing a pipe (repairing the short-term funding market) rather than unleashing a flood (stimulating the economy).

3. Why does the market view it as invisible QE:

The scale of $40 billion/month effectively expands the Federal Reserve's balance sheet, injecting a large amount of liquidity into the market, similar to the effects of QE.

However, the Federal Reserve has indicated in its forward guidance that it does not set a total limit on the scale and maintains policy flexibility.

Increasing liquidity will ultimately push up asset prices, and purchasing short-term government bonds will lower short-term interest rates, prompting funds to flow into riskier assets.

When signs of economic slowdown appear, such operations are often a precursor to larger-scale easing policies, and on the other hand, represent a substantive end to the tightening cycle and a return to the liquidity cycle. For investors, this is often interpreted as an increased risk of holding cash and an increased appeal of holding assets.