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After Market Turmoil, Fed Will Grow Balance Sheet Again


The Federal Reserve said Friday that it would buy more government-backed securities in a move meant to keep an obscure but critical corner of financial markets functioning smoothly.

The central bank said that it had decided to begin buying Treasury bills — expanding its balance sheet for the first time since 2014 — and would begin the purchases on Tuesday. The Fed will continue buying “at least into the second quarter of next year,” it said in a statement.

The Fed will also continue to intervene in the market for repurchase agreements, essentially short-term loans between banks and financial institutions. It started doing so last month for the first time since the financial crisis after rates on repos shot up briefly, spilling over to push the central bank’s benchmark interest rate higher. The Fed will conduct the operations “at least through January of next year,” according to the release, “to ensure that the supply of reserves remains ample even during periods of sharp increases in nonreserve liabilities.”

Unlike its previous bond buying campaign, which began during the Great Recession, the Fed stressed on Friday that its new effort is not meant to boost the economy. Jerome H. Powell, the Fed chair, signaled earlier this week that the central bank would “soon” begin buying assets for purely technical reasons and said it should not be confused with quantitative easing, or Q.E.

The Fed plans to purchase Treasury bills, which are shorter-dated government debt, at an “initial” pace of about $60 billion per month from mid-October to mid-November, according to the release. It then plans to adjust both the timing and amounts of bill purchases “as necessary to maintain an ample supply of reserve balances over time.”

The goal is to grow the balance sheet until bank reserves — currency deposits at the Fed — get back to “or above” their early-September level, the release said.

Last month’s market volatility was bad news for the central bank. Rates on repurchase agreements, or repos, shot higher starting Sept. 16 as a confluence of events sucked dollars out of the financial system. A deadline for corporate tax payments and issuance of new Treasury debt led to a dollar shortage — stresses that were unusual, but not unexpected. The disruption spilled over into other money markets, temporarily pushing the Fed’s policy interest rate, the fed funds rate, above the range policymakers had set for it.

That run-up raised alarm bells. Officials had decided earlier this year that they wanted to continue setting interest rates in what they call an “ample reserve” framework. In such an approach, the central bank keeps its balance sheet holdings big enough to leave plenty of cash in the financial system. Banks keep their extra cash on deposit at the central bank, and the Fed adjusts interest rates by changing how it pays on those excess holdings, commonly called reserves.

The Fed wanted to shrink its balance sheet to a point where it could run the system without regularly intervening in markets. September’s repo issues suggested that they might have gone too far, getting to a point where reserves — which no longer move around the system as easily as they once did — were insufficient to smooth over turbulence.

Friday’s move is aimed at fixing that by getting those reserves back to a point where they are plentiful, Federal Reserve Bank of Minneapolis President Neel Kashkari said in an interview.

“It’s not a change in our policy stance,” he said. The amount of bills the Fed buys “is going to depend on how much demand for dollars grows,” he said, and the adjustable approach to buying “gives us a lot of flexibility.”


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