Central Banks

Tuesday, January 21, 2020 - 14:11

MNI POLICY: Trump Adviser: Fed's T-Bill Buys 'Basically' QE


By Evan Ryser

WASHINGTON (MNI) - The Federal Reserve is practically engaging in quantitative easing without officially announcing such a policy, President Donald Trump's top economic adviser Larry Kudlow said Tuesday.

Asked whether the Fed's Treasury bill purchases is another way for the Fed to quietly do QE, "I basically do," Kudlow said in a panel in Davos, Switzerland.

"The net effect is they are expanding the balance sheet, whatever you wish to call it. I think it's not a coincidence that the stock market and housing market -- and indeed asset prices -- are rising again," he told the World Economic Forum.

"The stock market has been a mirror of all this stuff. It's almost uncanny," Kudlow said.

The Fed is purchasing USD60 billion of Treasury bills every month, in addition to injecting billions of dollars of cash in the form of overnight and term operations into the repo market, where banks and investors borrow cash for short periods of time in exchange for high quality collateral.

In September, repo borrowing costs spiked unexpectedly, prompting the Fed to swing into action to bulk up bank reserves in order to preserve control over short-term lending markets where monetary policy is implemented.

Fed Chair Jay Powell has characterized the purchases as a purely technical measure to support the effective implementation of monetary policy and having no change to the stance of monetary policy. However Dallas Fed President Rob Kaplan last week called the Fed's actions a "derivative of QE."

Kudlow also commented on the current stance of monetary policy, applauding the Fed for taking back the policy rate hikes in 2018, but saying the Fed should continue to cut.

"What are they worried about?" Kudlow asked.

However, diverging from a view Trump has supported, Kudlow said negative rates are ineffectual as a policy tool. "Negative rates are not helping banks recover."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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