Author: Alex Krüger
Translation: TechFlow
The Federal Reserve has just committed to purchasing $40 billion in U.S. Treasuries per month, and the market has already started shouting "Quantitative Easing (QE)!"
Although on the surface this figure seems to signal economic stimulus, the underlying mechanism tells a different story. Powell's move is not intended to stimulate the economy, but to prevent operational issues in the financial system.
The following is an analysis of the structural differences between the Federal Reserve's Reserve Management Purchases (RMP) and Quantitative Easing (QE), as well as their potential impacts.
What is Quantitative Easing (QE)?
To strictly define quantitative easing and distinguish it from standard open market operations, the following conditions must be met:
The Three Mechanical Conditions
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Mechanism (Asset Purchases): The central bank purchases assets, usually government bonds, by creating new reserve funds.
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Scale (Large Scale): The purchase amount is significant relative to the total market size, with the aim of injecting a large amount of liquidity into the system rather than making fine adjustments.
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Target (Quantity over Price): Standard policy adjusts supply to achieve a specific interest rate (price) target, while quantitative easing commits to purchasing a specific quantity of assets (quantity), regardless of how interest rates ultimately change.
Functional Condition
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Positive Net Liquidity (QE): The pace of asset purchases must exceed the growth rate of non-reserve liabilities (such as currency and the Treasury General Account). The goal is to forcibly inject excess liquidity into the system, not just provide the necessary liquidity.
What is Reserve Management Purchases (RMP)?
RMP is essentially the modern successor to Permanent Open Market Operations (POMO), which was the standard operating procedure from the 1920s to 2007. However, since 2007, the composition of the Federal Reserve's liabilities has changed dramatically, requiring an adjustment in the scope of operations.
POMO (Era of Scarce Reserves)
Before 2008, the Fed's main liability was physical currency in circulation; other liabilities were smaller and more predictable. Under POMO, the Fed purchased securities simply to meet the public's gradual demand for physical cash. These operations were calibrated to be liquidity-neutral and were small in scale, not distorting market prices or depressing yields.
RMP (Era of Ample Reserves)
Today, physical currency accounts for only a small portion of the Fed's liabilities, which are now dominated by large and highly volatile accounts such as the Treasury General Account (TGA) and bank reserves. Under RMP, the Fed buys short-term Treasuries (T-Bills) to buffer these fluctuations and "continuously maintain an ample supply of reserves." Like POMO, RMP is also designed to be liquidity-neutral.
Why Launch RMP Now: The Impact of TGA and Tax Season
The reason Powell implemented the Reserve Management Purchases (RMP) is to address a specific financial system issue—the TGA (Treasury General Account) liquidity drain.
How it works: When individuals and businesses pay taxes (especially during the main tax deadlines in December and April), cash (reserves) is transferred from their bank accounts to the Fed's government checking account (TGA), which is outside the commercial banking system.
Impact: This transfer of funds drains liquidity from the banking system. If reserves fall too low, banks will stop lending to each other, potentially triggering a repo market crisis (similar to what happened in September 2019).
Solution: The Fed is now launching RMP to offset this liquidity drain. They are creating $40 billion in new reserves to replace the liquidity that will soon be locked in the TGA.
Without RMP: Tax payments would tighten financial conditions (bearish). With RMP: The impact of tax payments is neutralized (neutral).
Is RMP Actually QE?
Technically: Yes. If you are a strict monetarist, RMP fits the definition of QE. It meets the three mechanical conditions: large-scale asset purchases ($40 billion per month) with new reserves, and the target is quantity rather than price.
Functionally: No. The role of RMP is stability, while QE's role is stimulus. RMP does not significantly ease financial conditions, but rather prevents further tightening during events like TGA replenishment. Since the economy naturally drains liquidity, RMP must run continuously just to maintain the status quo.
When Would RMP Turn Into True QE?
For RMP to turn into full-scale QE, one of the following two variables would need to change:
A. Change in Duration: If RMP starts buying long-term Treasuries or mortgage-backed securities (MBS), it becomes QE. By doing so, the Fed removes interest rate (duration) risk from the market, depresses yields, and forces investors into riskier assets, thereby pushing up asset prices.
B. Change in Quantity: If the natural demand for reserves slows (e.g., TGA stops growing), but the Fed continues to buy $40 billion per month, RMP becomes QE. At this point, the Fed is injecting liquidity into the financial system in excess of demand, and this liquidity will inevitably flow into financial asset markets.
Conclusion: Market Impact
RMP is designed to prevent the liquidity drain during tax season from impacting asset prices. Although technically neutral, its reintroduction sends a psychological signal to the market: "The Fed Put is in place." This announcement is a net positive for risk assets, providing a "mild tailwind." By committing to $40 billion in purchases per month, the Fed effectively sets a floor for banking system liquidity. This eliminates the tail risk of a repo crisis and boosts market leverage confidence.
It should be noted that RMP is a stabilizer, not a stimulator. Since RMP merely replaces liquidity drained by the TGA rather than expanding the net monetary base, it should not be mistaken for the systemic easing of true QE.
