Federal Reserve to Start Quantitative Easing as Labor Market Weakens
The Fed won't use the term, but it will begin easing monetary policy after announcing an interest rate cut.
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Am I surprised?
No, not that the Fed will be buying T-bills. While all of the "non-practitioner" academic economists on CNBC were "just shocked" that the central bank would have decided to start purchasing short-term debt securities when it did, I must ask: How did anyone not see this development?
Especially with the end of the year coming up, liquidity would have to be maintained at "ample" levels. I must now remind readers just what I wrote to you back in my Market Recon column on the morning of December 3:
"Over recent days, readers may have noticed that both the Secured Overnight Financing Rate and the Tri-Party General Collateral Rate have worked their way higher, even topping 4%. These rates are derived from the overnight repo market and are an indicator that bank reserves are running a little low and that liquidity conditions are tightening. Are these emergency levels? No. These rates have flirted with these levels and even higher levels than this as recently as October.
"These tightening conditions are likely what provoked the Powell-led Fed to wind down the central bank's quantitative tightening program. The problem would be that the Fed started to wind down that program a bit later than it should have. We, here, and others, did warn the Fed. As usual, they thought they knew better. As usual, they, being mostly academics and not practitioners, missed the mark. To be clear, this is a concern. This is not an emergency. The situation has to be closely monitored as we move into year's end.
"The solution? Should our central bankers decide that reserves are no longer ample, the Fed will need to act and add to the balance sheet through the purchase of short-term Treasury debt products. This will inject liquidity into the system while simultaneously pressuring short-term interest rates. Not rocket science, but they can't go to sleep on the issue."
Not to pat my own back (of course, I'm patting my own back, I don't know anyone else who called this) or the back of everyone here at TheStreet Pro, but investors and traders only had this dovish information a week ahead of time if they were subscribed to TheStreet Pro and if they read Market Recon every morning. If you simply rely on the clown show at CNBC, then you were "shocked" just as they were. In my opinion, the only surprise might be in the size of the program. I would have thought that it might start off with $25 billion or $30 billion per month. To go straight to $40 billion? It must realize that it took "QT" too far.
The Statement
The FOMC gave the economy and financial markets exactly what they expected, reducing the target range for the fed funds rate by 25 basis points to 3.5% to 3.75%.
For the most part, this statement was another cut and paste job, but some thought was actually given to what verbiage to remove and what to leave in. Toward the end of the second sentence in the first paragraph, "The unemployment rate has edged up but remained low through August" on October 29 was replaced by, "The unemployment rate has edged up through September" on December 10.
The implication? The FOMC as a group no longer sees labor markets being as strong as it once did and is creating more optionality going forward.
Then, at the end of the statement, a new paragraph was added. It introduced just what I spoke of up top. The new paragraph reads as, "The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis."
In the post-statement materials, among other actions:
"Effective December 11th, 2025, the Federal Open Market Committee directs the Desk to: Increase the System Open Market Account holdings of securities through purchases of Treasury Bills and if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves."
In addition, the FOMC directs the desk to, "Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities. Reinvest all principal payments from the Federal Reserve's holdings of agency securities into Treasury bills."
Is This Quantitative Easing?
The "know it alls" who actually have never run businesses or worked in financial markets will say that this is simply balance sheet maintenance. The fact is that the central bank is, starting Thursday, going to be expanding its balance sheet in order to maintain liquidity at satisfactory levels. This will expand the monetary base and the money supply at the same time. All while suppressing short-term interest rates.
Whether you want to call this management or the easing of monetary policy, this is dovish and this is a form of quantitative easing. Expect these operations to last into the new year "as necessary." That's likely April. Then the new kid will take over at the Fed in May. I have been driving it home to whoever would listen. I have been bullish into this year's end, and I am bullish well into the new year.
Economic Projections
Do these economists who vote on policy at the Federal Reserve's FOMC realize how stupid they often look? Sorry if that's harsh, but there were three dissents from today's one quarter point rate cut. Fed Gov. Stephen Miran wanted to cut rates by 50 basis points. Chicago Fed Pres. Austan Goolsbee and Kansas City Fed Pres. Jeffrey Schmid dissented in favor of no rate cut.
OK, now we look at the economic projections and the dot plot. The group's median projection for its 2025 year-end fed funds rate was 3.6%. That fits. The new target range is 3.5% to 3.75%. However, the dot plot reveals that six of these numbskulls saw a year-end fed funds rate of 3.9%.
That means that at least four of these grossly under-qualified individuals voted to reduce that rate at the last policy meeting of the year to the equivalent of 3.6% but saw that rate at 3.9% at year's end. You just can't make this stuff up, gang. Are they just stupid? I don't know, but we're not talking about candidates for Mensa here and even Mensa supposedly only requires an IQ of 132, which, let's be honest... is not very demanding at all.
The group is all over the map for 2026 with 15 dots in between 3.1% and 3.9% for a year from now. One dot for 2026 (Miran?) is all the way down at 2.1%. If I had a 2026 dot, it would probably be around 3.1%. I have the rate about half of one percentage point above the neutral rate. There were no surprises as far as 2025 GDP, unemployment or inflation are concerned.
I am somewhat stunned that the group sees GDP growth for 2026 at just 1.8%, down from 2.3% three months ago, but also saw unemployment and inflation falling. Can you make all that make sense while only shaving 25 basis points off of the fed funds rate for all of 2026? I don't think so. Well, at least the ol' P/L is having a good afternoon.
Good night, gang.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
