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October 14, 2019 — Fed Starts to Increase the Supply of Bank Reserves

OCTOBER 14, 2019 – FED STARTS TO INCREASE THE SUPPLY OF BANK RESERVES

Last week, the Fed announced it will start buying short term treasury debt starting tomorrow.  Their plan is to purchase $60 billion per month through the second quarter of 2020.  The Fed is correcting their decision to let reserves drop too low

The Fed had been shrinking its nearly $4 trillion asset portfolio over the last two years, allowing bonds to mature without replacing them.  As a result, unexpected strains arose last month in money markets as bank reserves fell too low, $1.4 trillion from $2.8 trillion in 2014 when the Fed stopped buying assets.  The Fed wants to rebuild its reserves to $1.5 trillion, the level seen at the beginning of September.  The Fed said the actions are “purely technical measures to support the effective implementation” of their policy and “do not represent a change in the stance of monetary policy.” 

Fed Chair Jerome Powell said the purchases are not a sign of quantitative easing. They are designed to maintain short-term lending rates and not to provide economic stimulus. As such, the portfolio purchases will be directed to short-dated treasury bills, not long-term securities.