Morgan Stanley warns: Ending QT ≠ Restarting QE; the U.S. Treasury's debt issuance strategy is the key.

A Morgan Stanley report indicates that the Federal Reserve ending quantitative tightening (QT) does not mean restarting quantitative easing (QE); it is merely asset swapping rather than adding new reserves. The U.S. Department of the Treasury’s debt issuance strategy is even more noteworthy. This article originates from Wall Street Insights, compiled, translated, and written by Foresight News. (Previous context: Will Bitcoin rebound 70% from $100,000? JPMorgan: Optimistic about BTC surging to $170,000 in the next 6-12 months) (Additional background: Bitcoin back above $103,000, U.S. stocks close higher, but JPMorgan CEO warns “credit bubble” is approaching) Morgan Stanley believes that the Fed’s end of QT does not equate to a restart of QE. The decision to end QT has sparked widespread discussion about a policy shift, but investors perhaps should not equate this move with the initiation of a new easing cycle. According to Morgan Stanley, at the recent meeting, the Fed announced it will end QT on December 1. This move is about six months earlier than previously expected. However, its core mechanism is not the “large liquidity infusion” market participants anticipated. Specifically, the Fed will stop reducing its holdings of U.S. Treasuries but will continue to allow approximately $15 billion of mortgage-backed securities (MBS) to mature and flow out of its balance sheet. Simultaneously, the Fed will purchase an equivalent amount of short-term government bonds (T-bills) to replace these MBS. This operation is essentially asset swapping, not an increase in reserves. Morgan Stanley’s Chief Global Economist Seth B Carpenter emphasized in the report that the core of this operation is to change the composition of the balance sheet, not its size. By releasing the duration and convexity risk associated with MBS while purchasing short-term bonds, the Fed has not substantially eased financial conditions. Ending QT does not mean restarting QE. It is crucial to distinguish this operation from quantitative easing, which involves large-scale asset purchases to inject liquidity into the financial system, lowering long-term interest rates and easing financial conditions. The current Fed plan is merely an internal adjustment of its asset portfolio. The report states that swapping maturing MBS with short-term Treasuries is a “securities exchange” with the market and will not increase bank reserves. Therefore, interpreting this as a restart of QE is a misconception. Morgan Stanley believes that although the decision to end QT early has attracted significant market attention, its direct impact may be limited. For example, halting the $5 billion monthly reduction in Treasuries six months early results in a total difference of only $30 billion, which is negligible relative to the Fed’s large portfolio and the overall market. Future balance sheet expansion is also not “money printing”: it is only to hedge cash needs. When will the Fed’s balance sheet expand again? The report suggests that, except in cases of severe recession or financial market crises, the next expansion will be for a “technical” reason: to offset the growth of physical currency (cash). When banks need to replenish cash at ATMs, the Fed provides banknotes and deducts corresponding reserves from the banks’ reserve accounts at the Fed. As a result, the growth of cash in circulation naturally depletes bank reserves. Morgan Stanley forecasts that over the next year, to maintain reserve levels, the Fed will begin purchasing Treasuries. At that time, the Fed’s bond purchases will increase by an additional $10 to $15 billion per month—on top of the $15 billion used to replace MBS—to offset the reserve outflows caused by cash growth. The report emphasizes that this bond-buying activity is solely to “prevent reserves from falling” and not to “increase reserves,” and should not be overinterpreted as a sign of monetary easing. The key point: the Treasury’s debt issuance strategy. Morgan Stanley believes that for asset markets, the real focus should shift from the Fed to the U.S. Department of the Treasury. The report analyzes that the Treasury is the key player in determining how much duration risk the market needs to absorb. The Treasuries reduced by the Fed ultimately return to the market through new debt issuance by the Treasury. Recently, the Treasury has been inclined to increase short-term debt issuance. The Fed’s purchase of short-term Treasuries may facilitate the Treasury’s further issuance of short-term debt, but this depends entirely on the Treasury’s final decisions. Related reports: The U.S. government may restart issuance this week but might not receive key data before the December Fed meeting; Fed Chair Powell: AI is not a bubble; tech companies have real cash flow, and a strong economy does not mean immediate rate cuts; The Fed’s rate cut tonight is almost certain! Market focuses on Powell’s speech: How will the government shutdown influence the Fed’s December policy path? 【Morgan warns: Ending QT does not equal restarting QE; the Treasury’s debt issuance strategy is the key】 This article was first published by BlockTempo, the most influential blockchain news media.