CAPATA Financial’s take on today’s FOMC press conference and announcement:
Notable comments from Chairman Powell during today’s FOMC press conference and announcement.
From the FOMC Statement :
- “The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.”: The implementation note from the Fed read as follows: “Increase the System Open Market Account holdings of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves.” This policy not only ensures that the balance sheet will remain at current levels but will cause it to grow, as the Fed uses both income and principal from its securities to purchase Treasury bills and notes. Although this does not change monetary policy in terms of the Fed Funds rate set by the FOMC, it does influence borrowing costs in the real economy by directly affecting rates out to three years when the Fed purchases securities with those maturities.
From the FOMC press conference:
- “As detailed in a statement released today by the Federal Reserve Bank of New York, reserve management purchases will amount to $40 billion in the first month and may remain elevated for a few months to alleviate expected near-term pressures in money markets.”: Powell’s prepared statement emphasized that the intervention by the New York Fed in the implementation of policy has “no implications for the stance of monetary policy,” a claim that runs counter to intuitive thinking. If the transmission effect of monetary policy, as determined by the Fed Funds rate, is to influence longer term rates and thereby credit conditions in the economy, it follows that the purchase of longer term Treasuries outside of Treasury bills would in fact affect policy. The size and maturity structure of the Fed’s balance sheet will continue to be its most influential tool.
- “So, yes, the adjustments since September bring our policy within a broad range of estimates of neutral.”: Powell’s admission that the current policy rate is within the range of neutral suggests that the FOMC will remain on hold if inflation and labor markets stay at current levels. His indication that the policy rate is on the higher end of that range further implies that the most likely next move would be a cut.
- “But I think a world where job creation is negative, I just think we need to watch that situation very carefully and be in a position where we’re not, you know, pushing down on job creation with our policy.”: Powell made these comments in response to a reporter’s question about recent jobs data and how the Fed is balancing both sides of its dual mandate of price stability and maximum employment.
In summary, we believe the real news was not the rate cut announced today, which based on forward guidance was highly anticipated, but rather the implementation of “reserve management purchases.”
When the Fed implemented quantitative easing (QE) during the financial crisis in 2008 to 2009, it crossed the longstanding threshold of purchasing Treasuries outside of Treasury bills, government obligations of one year or less. The Fed had not previously purchased large quantities of Treasury securities beyond bills since World War II, a practice that ended with the Treasury Fed Accord of 1951. William McChesney Martin (Fed Chair from 1951 to 1970) advocated a “bills only” doctrine, arguing that the Fed should not influence credit conditions in the real economy and that purchasing Treasury notes and bonds would distort interest rates through government action. This philosophy aligned with the post WWII commitment to a market based economy, in contrast with centrally planned systems like the USSR.
Now that this threshold has been crossed, we continue to see the Fed move further out on the yield curve with its so called “short term” purchases. The Fed’s definition of short term now encompasses maturities out to three years. We view this as a slippery slope and have long anticipated that the Fed will continue expanding its purchases further along the curve, deliberately influencing longer term yields and credit conditions in the real economy. As Kevin Warsh (former Fed Governor) and Treasury Secretary Bessent have argued, the Fed should step out of the foreground of headline driving economic news outside of crises and recessions. Yet this outcome seems increasingly unlikely as the implementation of monetary policy now places greater emphasis on the size and maturity of balance sheet operations.
In the near term, we see these actions as stimulative, but we believe they will carry long term consequences, particularly as the Fed’s balance sheet continues to expand. As Warren Buffett once quipped, “In God We Trust may be imprinted on our currency, but the hand that activates our government’s printing press has been all too human.”
Source: Federal Open Market Committee (FOMC), Press Conference, December 10, 2025
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