Market concerns: Is the $40 billion in Fed bond purchases really QE?

Recently, when the U.S. Federal Reserve (Fed) announced it would purchase $40 billion in government bonds each month, the market immediately associated this with a familiar concept: Quantitative Easing (QE). However, the reality is more complex than these figures suggest. Powell’s move is essentially a defensive measure, not to stimulate the economy, but to maintain the stability of the financial system.

Distinguishing Two Commonly Confused Concepts

What is QE? To be considered true Quantitative Easing, a program must meet three key requirements:

• Method: The central bank creates new reserves to purchase assets (primarily government bonds)
• Scale: The volume of purchases must be significant relative to the overall market to inject additional liquidity into the system
• Orientation: QE prioritizes the quantity of assets over price targets, meaning the Fed commits to buying a fixed amount regardless of how interest rates ultimately fluctuate

Additionally, QE must generate a positive net liquidity flow—that is, the rate of asset purchases exceeds the growth rate of non-reserve debt. The goal is to create a stimulative effect within the financial system.

Reserve Management Purchases (RMP) are different: This is actually a modernization of the Permanent Open Market Operations (POMO), a standard method from the 1920s until 2007. After 2008, when the Fed’s debt structure fundamentally changed, its scope of operations also had to be adjusted.

The History: From POMO to RMP

Before 2008, physical cash was the Fed’s main debt instrument, and other liabilities could be forecasted. The Fed only needed to buy securities to meet the natural demand for cash from the public. These transactions were small-scale and liquidity-neutral, not distorting market prices.

However, from 2008 onward, the picture changed entirely. Physical cash accounts for only a small part; most of the Fed’s liabilities are now large, volatile accounts, such as the Treasury General Account (TGA)—the government’s account at the Fed, outside commercial banking systems. This process withdraws liquidity from the system.

RMP was created to manage this instability. The Fed purchases short-term government bonds (T-Bills) to buffer fluctuations from the TGA, maintaining “a continuous abundant reserve supply.” Essentially, RMP remains a liquidity-neutral tool, similar to POMO.

Why Now? The Impact of TGA and Tax Season

The question is: why did Powell decide to activate RMP now?

Simple mechanism: When individuals and organizations pay taxes (especially in December and April), funds are transferred from their bank accounts to the TGA—a government account at the Fed, outside the commercial banking system. This process withdraws liquidity from the system.

Risks: If banks’ reserves fall too low, they will cease lending to each other. The repo market—where banks borrow overnight liquidity—could freeze (as evidenced in September 2019).

Solution: RMP aims to compensate. The Fed creates $40 billion in new reserves each month to replace the liquidity that is about to be locked in the TGA.

In other words: Without RMP, tax season would tighten financial conditions. With RMP, these effects are neutralized.

Is RMP Really QE?

Technically: Possibly. If applying a strict monetary definition, RMP meets the three mechanical conditions of QE—large-scale asset purchases ($40 billion/month) with new reserves, prioritizing quantity over price.

Functionally: No. RMP is a stabilization tool, whereas QE is an easing tool. RMP does not actively loosen financial conditions; it merely prevents them from tightening. Since the economy naturally withdraws liquidity, RMP must operate continuously to maintain the status quo, not to expand the net money supply.

When Does RMP Become Actual QE?

For RMP to fully qualify as QE, one of two changes must occur:

Change in maturity: If the Fed begins purchasing long-term bonds or mortgage-backed securities (MBS), it would become QE. The Fed would then eliminate interest rate risk from the market, push yields lower, and force investors toward riskier assets, thereby raising asset prices.

Change in volume: If natural reserve demand slows down (for example, if TGA stops increasing), but the Fed still buys $40 billion monthly, RMP would turn into QE. At that point, excess liquidity would flow into asset markets.

Psychological Signal More Than Numbers

Although technically RMP is neutral, the Fed’s reactivation of this program sends a clear signal: “The Fed’s safety net” (Fed Put) has been activated.

This message is positive for risk assets, creating a “mild tailwind” for the market. With a commitment of $40 billion per month, the Fed essentially sets a floor for banking system liquidity. The risk of a repo crisis is eliminated, and confidence in leverage increases.

In summary: RMP is a stabilization tool, not an easing one. Since it only offsets liquidity withdrawn from the TGA without expanding the net money supply, it should not be confused with actual QE.