Powell Says Not Yet to Quantitative Easing While Easing Quantitatively

By Michael Kelman Portney

On Wednesday, a fellow by the name of Jerome Powell, chairman of the Federal Reserve, architect of the pandemic-era balance sheet expansion, and a man who has demonstrated no more backbone than a chocolate éclair when it comes to semantic consistency, announced that the Fed would begin purchasing $40 billion per month in Treasury securities.

He was emphatic that this does not constitute quantitative easing.

Now, I found this rather curious.

See, quantitative easing is when the central bank purchases securities to expand its balance sheet and inject liquidity into the financial system. What Powell announced Wednesday is called "Reserve Management Purchases," which is when the central bank purchases securities to expand its balance sheet and inject liquidity into the financial system.

The distinction, I'm told, is a matter of intent.

It's like buying a rotisserie chicken so you can put it back in the oven. You're not cooking; you're engaged in thermal management of a pre-prepared protein. Completely different methodology. The chicken doesn't know the difference, mind you. Gets hot either way.

The Galileo of "Not QE"

This is not Chairman Powell's first contribution to the field.

In October of 2019, following a spectacular malfunction in overnight lending markets that sent repo rates spiking to ten percent, which I gather is considered a mite spicy for that particular instrument, Powell announced the Fed would begin purchasing Treasury bills at a pace of $60 billion per month.

A reporter asked whether this constituted quantitative easing.

"This is not QE," Powell declared. And then, as if concerned he hadn't been sufficiently clear: "In no sense is this QE."

In no sense.

Here I've been, for the better part of two decades, operating under the assumption that when a central bank purchases securities and expands its balance sheet, that's quantitative easing. Like some kind of maniac. The conventional way. And this entire time, I could have been categorizing identical operations as fundamentally different based on the stated therapeutic intent of the practitioner.

What a revelation. Does anybody have a glossary?

A chap named George Selgin over at the Cato Institute found this formulation so delightful he coined his own term: "Supplementary Organic Asset Purchases." SOAP. The Fed had been stressing the organic nature of balance sheet growth, you see. Very natural. Free-range securities acquisition.

Selgin observed, with what I can only characterize as the weary precision of a man who has been watching this particular circus for too long: "In some sense it doesn't matter why they're doing it or what they call it. What matters is that they are creating base money and expanding their balance sheet, and those repercussions aren't going to depend on what they call it."

Quite so.

The Target Nobody Can Define

The stated purpose of these Reserve Management Purchases is to maintain "ample reserves" in the banking system.

I endeavored to locate the Federal Reserve's official definition of "ample reserves."

There isn't one.

The St. Louis Fed, and I want you to appreciate that this is the Federal Reserve's own research division, not some crank with a newsletter, acknowledges this directly. I quote: "While there is no official definition of an ample reserves regime, ample reserves could be considered the minimal level of market liquidity required to implement monetary policy efficiently and effectively."

Could be considered.

I'm no systems analyst, but introducing undefined target parameters into a multi-trillion-dollar feedback mechanism while your primary control instrument is operationally indistinguishable from a previously discontinued intervention seems like it might violate some principle of thermodynamics. Or perhaps just common sense. One of those two things.

A Windswept Town Called the FOMC

The Federal Open Market Committee is a peculiar institution, twelve voting members, rotating regional bank presidents, a culture of studied ambiguity and a lexicon that would make a Byzantine logothete blush with professional envy. It's a place where "data dependent" can mean just about anything you need it to mean, depending on which way the wind is blowing and whether the bond market has started making concerning noises.

Wednesday's meeting produced the most fractured committee in six years. Three dissents. Governor Stephen Miran wanted to cut rates by half a percentage point. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid voted for no cut at all. The remaining nine settled on a quarter point, bringing rates to 3.5 percent to 3.75 percent.

And then they announced $40 billion a month in securities purchases.

Which is not QE.

Powell, threading this needle with all the grace of a man about as fit for the task as a tailor's dummy, told reporters: "Everyone around the table at the FOMC agrees that inflation is too high and we want it to come down, and agrees that the labor market has softened and that there's further risk."

[pause]

"Where the difference is, is how you weigh those risks."

He then blamed President Trump's tariffs for "really causing most of the inflation overshoot."

Mind you, this is the same Powell whose likely replacement, Kevin Warsh, who quit the Fed Board in 2011 specifically because he opposed balance sheet expansion, has been hammering the Fed alongside Treasury Secretary Bessent for years of QE that concentrated wealth among asset owners while younger households "missed out on appreciation."

So Powell is being criticized by the incoming administration's probable Fed chair for doing too much balance sheet expansion, while simultaneously announcing balance sheet expansion, while insisting the balance sheet expansion isn't the kind of balance sheet expansion he's being criticized for.

I tell you, the man has a brain of about six guinea pig power, but he's developed a survival instinct that borders on the magnificent.

The Semantic Fortress

The Fed's official position is that Reserve Management Purchases differ from quantitative easing in three material respects.

First, RMPs target short-term Treasury bills, whereas QE targeted longer-term securities.

Second, RMPs are "technical operations" to maintain liquidity, whereas QE was "stimulative."

Third, RMPs are modest in scale, whereas QE was massive.

To which one might observe:

First, money is fungible.

Second, liquidity is stimulative. That's rather the point of liquidity.

Third, $40 billion per month is $480 billion per year, which, and I checked this, is not zero billion per year.

The Fed's own implementation note states that the Open Market Desk is authorized to purchase Treasury bills "and, if needed, other Treasury securities with remaining maturities of 3 years or less."

If needed.

So it starts with bills. But the authority exists to expand. Purely technical. Definitely not QE.

It's like ordering a salad and telling your cardiologist you've changed your diet. The croutons are technical. The ranch dressing is reserve management. The bacon bits are authorized if needed for operational reasons.

The Observation

Here is what I have observed, studying this particular specimen over the years.

When the Federal Reserve purchases securities and the economy is in crisis, they call it quantitative easing. When the Federal Reserve purchases securities and the economy is not in crisis, they call it something else. When asked whether the something else is quantitative easing, the chairman becomes rather animated about the categorical distinction.

The market, meanwhile, responds to both in approximately the same fashion. Asset prices rise. The dollar softens. Risk appetite expands.

The liver doesn't much care about the semantic framework. It processes the ethanol regardless of whether you've filed the paperwork as "wine with dinner" or "grape based hydration therapy."

Powell's term expires in May. He told reporters he's focused on my remaining time as chair. The leading candidate to replace him thinks the balance sheet is too large. The Fed just announced it's making the balance sheet larger.

Six years ago, George Selgin suggested we might see SOAP 1, SOAP 2, or SOAP 3.

We appear to be in the spin cycle.