The current Federal Reserve has reached a stage where it must prepare a narrative for the next round of liquidity.
Unlike QE, which directly stimulates the economy, the Federal Reserve will package their easing actions more discreetly.
In this FOMC meeting, there is a high probability of seeing some clues.
In fact, the Federal Reserve has already laid some groundwork to address liquidity issues.
The FOMC has stopped the previous balance sheet reduction and will no longer reinvest in maturing assets starting from December 1, which means that the principal of agency bonds/agency MBS will be returned and reinvested in Treasury bills, while extending the maturity of maturing government bonds.
Furthermore, the New York Fed trading desk has made it clear that starting in December, it will carry out these reinvestments through purchasing Treasury bills in the secondary market, and will announce the operational arrangements monthly.
During the last FOMC meeting, it was mentioned that increasing the proportion of Treasury bills would allow the Federal Reserve greater policy and reserve management flexibility without the need to significantly raise the total amount of reserves.
Federal Reserve official Williams also clearly stated in November that when assessing that reserves have reached sufficient levels, the next step would be to begin gradual asset purchases.
Therefore, in the coming months, it is likely that something will emerge that is not QE but is very similar to QE. The most discussed topic in the market right now is RMP, which stands for reserve management purchases.
So what is RMP?
The official explanation from the Federal Reserve is that as the economy grows, the demand for money will naturally increase. To ensure that there is enough money (reserves) in the banking system to handle daily payments and settlements, the Federal Reserve needs to passively buy some bonds to inject a little money into the market and maintain sufficient liquidity.
Its purpose is very straightforward: to maintain the operation of the banking system and prevent a shortage of money from causing interest rates to spike. The operation is also very simple: only buy short-term Treasury bills.
Why do we say it is essentially similar to QE?
Although the Federal Reserve tries to distance itself, in the eyes of the market and capital, the mechanisms of RMP and QE are exactly the same.
QE is when the Federal Reserve creates dollars out of thin air to buy bonds, allowing the market to receive cash. RMP also creates dollars out of thin air to buy bonds, letting the market receive cash. The result is the same: the Federal Reserve's balance sheet expands, and liquidity in the market increases.
For risk assets like cryptocurrencies and U.S. stocks, as long as the Federal Reserve is buying things, it is injecting liquidity. Whether to rescue the economy or maintain bank operations, any injection of money will eventually overflow into asset prices.
