US economy

As Fed Meets, Treasury Bill-Buying Campaign Draws Investors’ Eyes


But the exact timing, and the balance sheet’s ultimate size, are anyone’s guess.

Mr. Carpenter at UBS expects the Fed to continue buying $60 billion into March before tapering off those purchases. Bank of America analysts expect the Fed will carry on buying $60 billion in Treasury bills through June.

But they note that “risks are skewed” toward slower purchases. Either way could matter to markets.

“Fed balance sheet growth has likely supported the recent risk rally, but is unlikely the dominant driver, in our view,” the Bank of American analysts wrote.

To be clear, no one is sure of the exact mechanism by which the growth of the Fed’s balance sheet pushes stocks up.

But for investors, the basic point is that over the last decade the market adage “don’t fight the Fed” has been one of the most effective bits of investment advice available. When the Fed was buying, investors had better be, too.

The flip side, of course, is that markets have grown acutely sensitive to any indication that the Fed would shrink the bank’s balance sheet. In 2018, as the Fed lifted interest rates four times while reducing the size of the balance sheet, an across-the-board sell-off of stocks, bonds and commodities followed suit.

And perhaps the most famous example of this dynamic hit the markets in May 2013, after then-Fed Chair Ben S. Bernanke hinted in congressional testimony that the Fed could start to cut back on its bond-buying programs sooner than many had expected. The markets panicked, with stock and bond markets selling off simultaneously.

The Fed is faced with a similar, if less dramatic, communication challenge this year.

“If the market perception is that the Fed is pouring in liquidity and that’s boosting asset prices, once they start to pare back these Treasury purchases and or the overall sizes of the repo operations, it could be that the markets throw a bit of a tantrum,” said Kathy Bostjancic, chief United States financial economist at Oxford Economics.



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