By Randall W. Forsyth
The Federal Reserve's most important policy move this past week wasn't the cut in its policy interest rate but the resumption of its purchases of Treasury securities.
The official line is that the central bank's new buys of $20 billion of Treasury bills a month doesn't represent anything other than ordinary management of money-market conditions. Some veteran Fed watchers aren't so sure. In particular, the central bank purchases seem part of a coordination with the Treasury to help fund the massive U.S. budget deficit and tamp down longer-term bond yields.
As universally anticipated, the Federal Open Market Committee lowered its federal-funds target by a quarter-point, to a range of 3.50% to 3.75%. Less expected was the renewal of Fed securities purchases just weeks after the central bank ended its redemptions of some of its Treasury holdings.
Fed Chair Jerome Powell said these Reserve Management Purchases (RMPs) were made to prevent a tightening of short-term liquidity ahead of the April 15 tax payments. (When taxpayers render unto Uncle Sam, their checks go out of the financial system. Conversely, central bank purchases of securities add funds to the system.)
April is a ways off, however. George Goncalves, head of U.S. macro strategy at MUFG Securities America, says he doesn't know why the Fed would see the need to preempt tax-season pressures so far in advance. And he notes the Fed has ways to cope with temporary disruptions, such as the Standing Repurchase Agreement facility, which it didn't have in 2019 when the repo market suffered temporary shocks from liquidity shortages.
Goncalves notes the Fed will be buying more like $60 billion of T-bills a month, which includes the reinvestment of monthly paydowns from its $2 trillion of agency mortgage-backed securities holdings. Moreover, it could augment its bill purchases with short-term notes, he says. That would absorb a lot of paper from the markets.
Strategas' Washington policy team, led by Daniel Clifton, estimates the Fed's annual demand for $240 billion to $300 billion of T-bills would take up between 60% and 75% of the Treasury's issuance of these short-term obligations.
The RMPs don't constitute quantitative easing, or QE, as central bank buying is formally called, the Fed says. But the Fed T-bill purchases still have an impact, by allowing the Treasury's debt managers to boost T-bills' share to 30% of total borrowings from 22%, the Strategas team writes in a client note. In turn, auctions of notes and bonds would be smaller. In addition, the Treasury repurchases less actively traded ("off the run") notes and bonds with the stated aim of improving market liquidity. Those repurchases have been stepped up, to $150 billion annually.
The Fed's main policy tool, the federal-funds rate, hasn't affected longer-term rates. The Treasury 10-year yield is higher, not lower, since the Fed started cutting its target rate by a total of 1.75 percentage points in September 2024, which Apollo Global Management's chief economist, Torsten Sløk, calls a "mystery." This is both contrary to previous Fed cutting cycles, starting in 2001, 2007, and 2019, and despite a decline in oil prices, which typically means lower yields, he says.
Sløk further points to a widening spread between yields on the benchmark 10-year Treasury note and the 30-year bond. Strategists at 22V Research posit the rising 30-year yield is more reflective of longer-term fiscal and inflation risks than the fed-funds rate.
The Treasury's emphasis on short-term T-bill issuance and buybacks of longer maturities seems an attempt to lean against the market. Economists term this "financial repression," a politically more palatable means of dealing with burdensome government debt than tax hikes or spending cuts.
But it may be a King Canute effort of fighting the tide of rising longer-term yields worldwide. A Bloomberg index of global bond yields rose this past week to the highest level since 2009.
Deutsche Bank economists see a secular rise in the term premium (the extra yield demanded to compensate for risks of longer-term securities) from a reversal of trends that previously had pushed interest rates to historic lows following the financial crisis.
Household leverage is increasing, while corporate borrowing for capital expenditures, especially artificial intelligence investments, is rising. Politics have changed toward structural budget deficits (6.5%-7% of gross domestic product, double that of the first Trump administration). Rising yields abroad, especially in Japan, mean less incentive to send excess savings to America.
Whatever the case, TS Lombard's chief U.S. economist, Steven Blitz, calls the renewed Fed purchases an effective merging of the central bank with the Treasury, and a further step in the undoing of the 1951 Accord between the two to separate monetary policy from government debt management. This "fiscal dominance" of Fed policy will ultimately prove to be inflationary, he concludes.
Bank of America global rate strategists dubbed the Fed bill buying as "financial RMP-pression" in a client note Friday. While the Fed insists the purchases aren't quantitative easing, RMPs are to QE what beer is to drinking.
The buzz has been felt in gold and silver, while the major stock averages ended the week at or near records. And the 10-year Treasury yield was back to 4.20% Friday, a three-month high. The proof is in the markets.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 12, 2025 14:56 ET (19:56 GMT)
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