When the US Federal Reserve started pumping up its balance sheet once more last October, chairman Jay Powell insisted that such activity should not be seen as another round of "quantitative easing" — the big post-crisis effort to relax financial conditions.
Many investors were dubious then, and are still dubious now. "I think it is QE," said Koon Chow, a strategist at Union Bancaire Privée. "It might not be explicitly recognised as QE — but it is QE."
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Definitions matter, as stocks and other risky assets have soared since the new scheme was put in place. If the market considers it a similar form of extraordinary support as the earlier programme, then taking it away, or even tapering it, could be tricky.
So what, exactly, is the Fed doing?
The Fed is purchasing US$60 billion ($91b) of short-dated Treasury bills every month. That is in addition to pouring billions of dollars of cash into the repo market, where banks and investors borrow cash for short periods of time in exchange for high quality collateral such as Treasuries.
Why is it doing this?
In September the repo market seized up, pushing borrowing costs sharply higher and sending shockwaves through the financial system. The Fed swung into action because control over short-term lending markets is crucial to its ability to implement monetary policy and effect changes in interest rates.
The Fed's verdict was that bank reserves, or cash held at the central bank, had fallen too low, squeezing the amount of money that could be lent out into the repo market.
From October 2017 the Fed had begun unwinding QE and reducing the size of its balance sheet. As it stopped replenishing its stock of Treasuries, someone else had to buy them, pulling cash out of the banks and reducing reserves.
The Fed is now buying Treasuries again to rebuild its balance sheet — and in turn increase the level of reserves — back to a level where the repo market can function as it should.
So the Fed is buying Treasuries again. How is this not QE?
Quantitative easing was not just about the Fed buying Treasuries and mortgage bonds. The programme was designed to lower longer-dated interest rates to ease financial conditions, and so encourage investors out of safe assets such as Treasuries and into riskier investments like stocks and corporate bonds.
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The Fed has explicitly said that this time around, it is not trying to alter its monetary policy through its purchases. It is not buying Treasuries to affect interest rates.
This is why it is buying short-dated bills only. By limiting its purchases to debt that has a maturity of less than 12 months, the Fed is anticipating that the effect on longer-dated Treasury yields will be minimal. Still, some struggle to see the difference.
"They are not doing QE but the market doesn't believe them," said Priya Misra, an interest rate strategist at TD Securities. "[Investors] are saying it looks like QE, smells like QE, so therefore why is it not QE? It's a tough one for the Fed to push back on."
Why is the market so sceptical?
Intention is one thing, but how a policy plays out in the market is another. Some analysts and investors say regardless of the Fed's stated rationale, the purchase of Treasury bills is pushing asset prices higher as investors flood into corporate bonds and equities.
Since October 11, when the Fed announced it would begin buying Treasury bills, the S&P 500 has risen about 12 per cent, investment-grade corporate bonds have returned 2.4 per cent and high-yield bonds have returned 3.5 per cent.
This might not be because of any effect on interest rates. In fact, 10-year Treasury yields have risen since October. It could simply be that the Fed is removing Treasuries from the market at the same time as adding cash, said Matt King, a strategist at Citigroup.
Investors have to put this cash somewhere and if there are fewer Treasuries in circulation, it is more likely to go into stocks and corporate bonds.
"Central bankers sometimes like to think of the theory first and then look for market impact later," said King. "I prefer to do it the other way around and the impact on asset prices appears to be very QE-like."
Dallas Fed president Robert Kaplan admits there may be some unintended consequences to the central bank's repo fix.
"On the one hand this is not QE, but I think it is having some QE-like effects," he told the Financial Times last week.
Why does it matter? Isn't it irrelevant what it's called?
No. The Fed has been keen to emphasise that its bill purchases do not represent a shift in its monetary policy, but simply address a technical problem in the plumbing of financial markets.
The problem is that the Fed explicitly described quantitative easing as a way to ease monetary policy using its balance sheet, a programme the central bank said it halted five years ago. But the new purchases have the same effect: expanding the balance sheet.
The risk is that when the Fed begins to slow or stop these purchases, as it intends to do, it will be read by the market as a policy tightening. That could weigh on stocks and bonds, regardless of what the central bank does with interest rates.
"Since they struggled in communicating that reserve growth is not QE, stopping balance sheet expansion will be even more difficult to communicate," said Misra. "It will be seen as tightening."
Written by: Joe Rennison in London, Colby Smith in New York and Brendan Greeley in Washington
© Financial Times