Fed Resumes Bond Buying: A Strategic Return to Market Stability

The Federal Reserve will start purchasing short-term government bonds to maintain liquidity and control interest rates, commencing December 12 with an initial $40 billion in Treasury bills. The move follows the end of quantitative tightening and the reduction of the Fed's balance sheet to $6.6 trillion, addressing rising money market rates.

The Federal Reserve plans to resume buying short-term government bonds starting December 12 to manage liquidity levels. This initiative aims to ensure the central bank maintains control over its interest rate targets, following a policy announcement at its latest Federal Open Market Committee meeting.

Initially, the Fed will purchase around $40 billion in Treasury bills, gradually reducing the amount over time. This decision comes after the Fed stopped quantitative tightening, which had reduced its balance sheet from $9 trillion in 2022 to $6.6 trillion, and amid signs of tightened liquidity potentially affecting interest rate management.

Concerns rose in October as key money market rates increased, leading the Fed to halt QT. New York Fed President John Williams emphasized the inexact science of determining ample liquidity levels, indicating that once achieved, gradual asset purchases will commence. Analysts anticipate this action could stabilize year-end market fluctuations.

(With inputs from agencies.)