The Trump administration and the Federal Reserve are injecting massive liquidity into the financial system. While officials insist this is not quantitative easing, investors believe the effects are indistinguishable from QE. From Trump's order to purchase $200 billion in mortgage-backed securities, to the Fed restarting balance sheet expansion, and the relaxation of bank capital requirements, a series of policy measures are creating a liquidity feast. According to a Barron's report on Wednesday, the Trump administration has just ordered the two government-controlled mortgage giants, Freddie Mac and Fannie Mae, to purchase $200 billion in mortgage-backed securities (MBS), aiming to lower mortgage rates and stimulate homebuying demand. Simultaneously, since December of last year, the Federal Reserve has purchased $54.43 billion in short-term Treasury bills, marking the first significant expansion of its balance sheet since 2022. Daniel Clifton, Head of Policy Research at Strategas Securities, stated, "In aggregate, the stimulus this year is equivalent to one trillion dollars." Michael Lewitt of the investment newsletter The Credit Strategist wrote following Trump's MBS purchase announcement: "All pretense of fiscal/monetary tightening has vanished." These actions come as the Trump administration attempts to address affordability issues and boost the economy ahead of the November midterm elections. However, investors warn that the extra funds in the system could reignite inflation and push up asset prices that are already at elevated valuations. The combination of policies constitutes a "de facto QE." Although technically not meeting the definition of quantitative easing, a series of monetary and fiscal policy actions in Washington are producing similar effects. Quantitative easing typically refers to the Fed's large-scale purchases of long-term financial assets when interest rates are near zero, aimed at increasing liquidity and stimulating borrowing and investment—a tool usually deployed during economic recessions. Current interest rates are not at zero, and the Fed is not buying long-term bonds, which is why Clifton says he never calls it QE. However, Will Denyer, Chief U.S. Economist at Gavekal, wrote last month that the Fed is now fully engaged in policy easing. Since December 12 of last year, the Fed has purchased $54.43 billion in short-term Treasury bills, with purchases expected to total between $220 billion and $300 billion in the first year. When a central bank buys securities, it injects cash into the seller's reserve account at the Fed, thereby pumping new money into the financial system. The third interest rate cut implemented by the Fed last December further reinforced the narrative of monetary easing. Fed Chair Jerome Powell stated at last month's press conference that these actions do not constitute quantitative easing. But Denyer wrote that, in effect, the Fed provided investors with a modest dose of quantitative easing for Christmas, and the policy signal being sent is clearly dovish. The $200 billion MBS purchase plan sparks debate. Trump's order for Fannie Mae and Freddie Mac to purchase $200 billion in MBS is a core part of the policy mix. Federal Housing Finance Agency Director Bill Pulte told Reuters that the two entities each hold nearly $100 billion in available funds. Gavekal analyst Tan Kai Xian believes: "Is the MBS purchase QE? I think the answer is no. Partly because the money isn't being 'printed out of thin air.' The Trump administration is merely reallocating resources under its control." This logic also applies to the Fed's exchange of short-term Treasuries for cash—it's simply swapping one liquid asset for another. However, Mohit Kumar, Chief European Economist and Strategist at Jefferies, believes it is at least spiritually similar to QE, as Trump is requiring Fannie and Freddie to purchase duration assets and inject liquidity into the market. Seth Meyer, Portfolio Manager at Janus Henderson, wrote that while the success of these measures remains uncertain, the intent to directly address energy, housing, and financing issues is clear. Trump is also influencing one of the most "stubborn" components of household budgets: mortgages and rent. Eased bank regulation frees up credit space. Beyond direct asset purchases, the government is also stimulating credit creation by relaxing regulations. Through the GENIUS Act passed in July and this year's reduction in bank capital requirements, the government has provided major lenders with greater capacity to invest more in assets like Treasury bonds and cryptocurrencies. These measures, combined with MBS purchases and the Fed's balance sheet expansion, collectively form a multi-pronged mechanism for injecting liquidity. When government intervention and Fed actions ease financial conditions, the cash they inject into the market can flow into risk assets. Flood of liquidity raises valuation risks. Massive purchasing power can make investors feel there is a "floor" under asset prices, pushing them into the market even when valuations appear stretched. Lewitt wrote after Trump's MBS purchase announcement: "Until something breaks, we could see stock prices move higher on unsustainable valuations." The extra money in the system could also rekindle inflation, leading investors to watch the M2 money supply—a rough gauge of cash circulating in the system. Although M2 growth currently exceeds 4%, experts like Clifton believe inflation risks only become serious when growth reaches 6% to 8%. However, some analysts argue that Trump's measures could achieve their goals without the dangerous side effects typically associated with ill-timed, reckless government spending. Tan Kai Xian pointed out that Fannie Mae and Freddie Mac are deploying existing reserves, not creating new money. But for the market, regardless of the technical definition, the practical effect of the liquidity is already evident. The Republican party is striving to solve affordability problems and boost the economy before the midterm elections, and the ultimate impact of this liquidity feast remains to be seen.
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