The liquidity problems on the US money market have existed for some time and have steadily intensified in recent months. In mid-September, the US Federal Reserve pumped liquidity back into the money market for the first time in more than a decade. The measure became necessary after the effective funds rate (EFFR), i.e. the interest rate at which banks lend money to each other, had risen significantly. The trigger for this escalation was a chain of events – such as the quarterly payments of corporate tax or the payments for new T-Bill issues by the banks – which all contributed to a further shortage of already tight liquidity. As a result, the US overnight repo rate rose sharply (intraday: 10%!). The Fed had to intervene with several injections of liquidity totalling around USD 75 billion, causing money market rates to fall again.
After that, it was actually clear that the US Federal Reserve would do something to prevent the interbank market in the USA from drying up further. Now the Fed has announced that it will launch a new program to buy short-term US Treasury securities. The sole aim of this monetary policy measure is to prevent a repetition of the recent tensions in the US money market. Against this backdrop, Powell has repeatedly stressed that this is not a return to quantitative easing.
Accordingly, the Fed should start buying $10 billion to $20 billion a month in T-Bills in the near future. This volume is compatible with the growth in demand for money. For example, currency holdings in circulation have risen sharply in recent years because nominal GDP has increased, while interest rates are low overall and foreign demand for US dollars is very high. With a higher purchase volume, the Fed could increase the surplus reserves of the banks again relatively quickly. This will also increase liquidity in the banking sector, which is intended to ensure that money market rates are again aligned with the US key interest rate and that the Fed thus retains control over these rates.