Fed plans to buy more Treasury papers to control lending rates
WASHINGTON (AP) – The Federal Reserve said Friday that it will buy short-term Treasury bills each month until the second quarter of 2020 to inject cash into the banking system and make it easier to control its benchmark lending rate.
The action marks the Fed’s latest response to a shortage of cash reserves that developed last month and caused short-term interest rates to spike, briefly sending the Fed’s benchmark rate above its target range. The New York Fed said its first monthly purchases, starting Tuesday, will total $60 billion. Future amounts weren’t specified.
The Fed also said it will extend a separate short-term lending operation through January that is also intended to boost bank reserves.
Chairman Jerome Powell has said these Treasury purchases aren’t intended to stimulate the economy. On Friday, the Fed said its purchases are “technical” and “should not have any meaningful effects on household and business spending decisions and the overall level of economic activity.”
Even so, large Fed bond-buying programs typically attract attention from economists and investors because they recall the extraordinary programs the central bank undertook to support the economy during the Great Recession and its economically sluggish aftermath.
For several years through 2013, the Fed bought roughly $1.5 trillion of Treasury’s and mortgage bonds to try to hold down long-term interest rates and encourage more borrowing and spending. Lower rates also led investors to invest more in stocks.
At the time, many critics feared that the purchases, known as “quantitative easing” or QE, would stoke rampant inflation. That fear proved unfounded.