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... the overall level of economic activity.”
During the Great Recession and its economically sluggish aftermath, the Fed bought roughly $1.5 trillion of Treasurys and mortgage bonds to try to hold down long-term rates and encourage more borrowing and spending. Lower rates also led investors to invest more in stocks.
This time, the Fed has stressed that its new bond-buying isn’t intended to affect most interest rates. Instead, they are intended to help the Fed’s tools for setting interest rates work better.
“Purchases of Treasury bills likely will have little if any effect on longer-term interest rates, broader financial conditions, or the overall stance of monetary policy,” the Fed said in a written Q&A.
The purchases will begin Tuesday. Fed policymakers met by video conference last Friday to approve the new buying operations.
The Fed’s benchmark interest rate is now a range of 1.75% to 2%. Changes in that rate flow through other interest rates, like those charged on mortgages, to influence borrowing and spending and the broader economy.
The central bank keeps its short-term rate in its target range by paying banks interest on the reserves they hold at the Fed. That rate is 1.8%. Banks are unlikely to lend at less than that rate.
But shortages of reserves occurred last month. Most experts blame quarterly tax payments made by many banks as well as auctions of new Treasury securities by the government, which soaked up cash. The reserve shortfall caused rates to spike in several short-term funding markets. If it continued, such spikes could offset the Fed’s efforts to keep interest rates low.
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