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Fed to buy $60B in Treasury bills per month to prevent money market volatility

The Federal Reserve said Oct. 11 that it will buy up Treasury bills starting in mid-October to boost liquidity in the financial system and help prevent episodes of money market volatility like the one that occurred in September.

The Fed's monthly T-bill purchases will start at about $60 billion each month, and the purchases will continue until at least the second quarter of 2020, the Federal Open Market Committee announcement said.

"These actions are purely technical measures to support the effective implementation of the FOMC's monetary policy, and do not represent a change in the stance of monetary policy," the FOMC statement said.

The FOMC met by video conference Oct. 4 to discuss the issue, and it voted unanimously to approve the plan Oct. 11.

The announcement, which Fed Chairman Jerome Powell previewed in an Oct. 8 speech, comes after a spike in short-term money market rates in mid-September. Rates jumped partly due to temporary factors, such as a corporate tax payment deadline and a larger-than-usual issuance of Treasury securities, both of which helped draw reserves out of the banking system.

But underlying those temporary factors was the Fed's earlier effort to reduce its balance sheet, which peaked at $4.5 trillion due to the central bank's postcrisis quantitative easing purchases.

The Fed started slimming its balance sheet in 2017 and stopped doing so in August. The balance sheet draw-down led to a reduction in bank reserves over the past two years, but other factors, such as growth in currency, also gradually ate into bank reserves.

The monthly purchases are aimed at getting bank reserves back "at or above the level that prevailed in early September 2019," the FOMC statement said.

Powell and other policymakers have emphasized that Fed purchases of short-term T-bills are not the same as the central bank's postcrisis QE effort, when the Fed bought up longer-term Treasury bonds in an effort to bring down long-term interest rates.

"In no sense is this QE," Powell said at an Oct. 8 event in Denver.

The Fed underlined that point in an FAQ accompanying the announcement, saying the T-bill purchases "will have little if any effect on longer-term interest rates, broader financial conditions or the overall stance of monetary policy." Therefore, the purchases "should not have any meaningful effects on household and business spending decisions," the Fed added.

Since the bout of money market volatility in mid-September, the New York Fed has been conducting temporary asset purchases to help ensure there is adequate liquidity in the system.

The FOMC statement said those temporary purchases will continue through at least January of next year "to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation."