On December 18, the Federal Reserve recently announced plans to purchase $40 billion in short-term Treasury securities per month. While this news briefly triggered a rebound in the cryptocurrency market, RadexMarkets argues that such operations are fundamentally different from past quantitative easing (QE) measures.
Traditional QE primarily involved purchasing long-term Treasury bonds and mortgage-backed securities (MBS) to directly boost risk asset prices and stimulate economic growth. In contrast, the Fed's current short-term Treasury purchases aim to maintain banking system liquidity and stabilize short-term interest rates, rather than encouraging market risk appetite through large-scale asset acquisitions. RadexMarkets emphasizes that investors should not interpret this as stimulus akin to pandemic-era policies.
Last week, the Fed cut benchmark interest rates by 25 basis points while launching its short-term bond purchase program. This decision briefly fueled optimism in the cryptocurrency space, with Bitcoin prices rising temporarily before retreating. Currently priced around $87,000, Bitcoin has fallen roughly 7% from its recent peak. RadexMarkets notes that this reflects market misunderstanding—the operation primarily increases cash reserves in the banking system to prevent liquidity strains for banks, businesses, and investors in short-term funding markets. Unlike pandemic QE, the Reserve Management Operation (RMO) does not seek to lower long-term rates or broadly incentivize investment.
By late October, total reserves in the U.S. banking system had dipped below the perceived safe level of $3 trillion, driving up overnight lending rates and raising financial stress risks. RadexMarkets explains that the Fed’s short-term bond purchases help replenish bank reserves, reducing interbank borrowing costs and stabilizing short-term rate fluctuations. However, this measure will not significantly impact long-term rates or directly fuel risk asset rallies or sustained economic growth. Market observers like Conks also view RMO as "preventive maintenance" rather than economic stimulus.
Additionally, RadexMarkets highlights RMO’s strategic foresight. Each April, quarterly tax payments by businesses and individuals drain liquidity, potentially tightening short-term funding markets. By injecting liquidity in advance, the Fed aims to prevent a repeat of the September 2019 rate spike, demonstrating regulators’ vigilance against systemic risks while ensuring stable funding conditions.
From a market perspective, while short-term liquidity improves, the medium-to-long-term trajectory of risk assets like Bitcoin still hinges on macroeconomic trends and investor sentiment. RadexMarkets advises investors to assess the Fed’s move rationally—it is more about safeguarding financial stability than traditional QE. The operation removes some uncertainty and provides underlying support but will not generate substantial short-term asset price stimulus.
In summary, RadexMarkets concludes that the Fed’s short-term bond purchases are a maintenance policy to ensure smooth financial system functioning, focused on stabilizing short-term rates and liquidity rather than stimulating the economy or risk assets. Investors should understand its true nature and avoid misinterpreting short-term price swings as long-term policy shifts.
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