Key Points
- The Fed began buying short-term government bonds on December 12.
- The goal is to ensure financial markets run smoothly, not to change economic policy.
- The initial purchase totaled about $40 billion in Treasury bills. The Fed plans to buy bonds at a faster pace until April to offset tax payments.
- At the same meeting, the Fed also cut its main interest rate by 0.25%.
The Federal Reserve began buying short-term government bonds earlier this month to ensure the U.S. financial system continues to function smoothly. According to the minutes of the Fed’s December 9-10 meeting, the central bank’s staff recommended the move, and policymakers agreed that cash reserves in the banking system had fallen to a level that warranted attention.
Fed Chair Jerome Powell was very clear that these purchases are a technical adjustment, not a major shift in the country’s economic policy. The Fed isn’t trying to stimulate the economy or lower interest rates further. They are simply injecting cash into the system to prevent any unexpected problems in the short-term lending markets.
“Policymakers generally emphasized the importance of communicating that [these purchases] would be made solely to ensure interest rate control and smooth market functioning,” the minutes said.
The Fed began buying Treasury bills on December 12, with an initial purchase of around $40 billion. This decision came after the bank noted that cash, or “liquidity,” was tightening, which could make it harder for the Fed to manage its main interest rate.
By buying these bonds, the Fed is effectively injecting more cash into the financial system to maintain stability.
The Fed staff told policymakers it would be “prudent” to begin buying bonds at a “somewhat elevated pace” through late April. This is because individuals and companies will be paying taxes around that time, which temporarily drains significant cash from the banking system. After April, the Fed plans to slow down its purchases.
During the same meeting, the Fed also cut its main interest rate by a quarter of a percentage point. However, the minutes make it clear that the two decisions were separate. The bond-buying program focuses on keeping the plumbing of the financial system working properly, while the rate cut was a response to the broader economic outlook.
