Beyond its stated goals of employment and price stability, the Fed's recent aggressive asset purchases show its primary role is often to ensure smooth market functioning, making it dependent on market signals.

The Fed's decision to launch large-scale Reserve Management Purchases (RMPs) ahead of schedule implicitly signals that its standing repo facility is not functioning as effectively as hoped. This suggests the Fed is opting to inject liquidity directly rather than rely on the facility, which may require future improvements.

The Fed's intervention in funding markets, while not officially labeled Quantitative Easing, directly helps the Treasury finance its debt, effectively monetizing it and providing critical liquidity to markets.

The common narrative of the Federal Reserve implementing Quantitative Tightening (QT) is misleading. The US has actually been injecting liquidity through less obvious channels. The real tightening may only be starting now as these methods are exhausted, signaling a significant, under-the-radar policy shift.

The Fed has a clear hierarchy for managing liquidity post-QT. It will first adjust administered rates like the Standing Repo Facility (SRF) rate and use temporary open market operations (TOMOs) for short-term needs. Direct T-bill purchases are a more distant tool, reserved for 2026, as the system is not yet at 'reserve scarcity'.

The impending halt of the Fed's balance sheet reduction (QT) is not a reaction to a major economic crisis, but a technical necessity to prevent stress in short-term funding markets as bank reserves become scarce. The Fed is preemptively avoiding a 2019-style repo spike, signaling a quiet return to mild balance sheet expansion.

While the Fed's Reserve Management Purchases will absorb significant T-bill supply, J.P. Morgan predicts the Treasury will still increase coupon auction sizes. This is based on the belief that a prudent debt management strategy will avoid over-reliance on short-term T-bills to prevent financing cost volatility.

The Fed's plan to reinvest maturing mortgage-backed securities (MBS) into Treasury bills is a stealth liquidity injection. The US Treasury can amplify this effect by shifting issuance from long-term bonds to short-term bills, which the Fed then absorbs. This is a backdoor way to manage rates without formal QE.

Over the past few years, the Treasury Department and the Federal Reserve have been working at cross-purposes. While the Fed attempted to remove liquidity from the system via quantitative tightening, the Treasury effectively reinjected it by drawing down its reverse repo facility and focusing issuance on T-bills.