The Federal Reserve building
| Photo Credit:
Joshua Roberts
Last week the US Federal Reserve not only cut interest rates as expected but also announced a plan to restart purchase of US treasures. But wait, is it quantitative easing (QE)? The debate is on. The Federal Reserve is calling it reserve management, but critics argue any injection of money by the central bank is a form of quantitative easing. Typically in the past, QE money has been used to buy long term treasuries. But there is always the first time.
In its defence, the Fed insists this liquidity injection move was required to ensure the Fed Funds rate remains within its target range. While this move might be a surprise to many, readers of this column will be aware that multiple times over the last few weeks we had mentioned that there has been tightening of liquidity in the US and this was also a factor driving the correction in assets like cryptos and some overvalued AI stocks. As result of this tightening, the target range of the Fed Funds rate was getting tested in market as financial institutions that required liquidity weren’t able to borrow within the target range. Interest rates across the economy are set based on the target range and if that is breached it can impact the Fed’s objectives.
In September 2019, the US financial system went through something that is termed as a repo market crisis, when the repo rates on transactions between financial institutions for liquidity management spiked significantly above the Fed Funds rate. While the Fed Funds rate is rate at which banks borrow from each other (usually unsecured), the repo rate is the rate at which a wider group of financial institutions borrow from each other using high quality collateral. Given the repo transactions are backed by high quality collateral, it is expected to track the Fed Funds rate very closely. However, when there was unexpected tightening of liquidity in the US in September 2019 due to withdrawal of deposits for tax payments, large treasury issuances and few other factors, this resulted in instances of the overnight repo rates spiking to as high as 10% in short instances versus the Fed Funds rate ceiling at 2.5 per cent then.
Hence, the reserve management or QE (call it whatever) that the US Fed is implementing now is to ensure an ample reserves regime, as the signals on tightening of liquidity now were giving the September 2019 vibes.
Quickly following this, there were views that this liquidity injection would be positive for Indian markets in terms of FII flows, but that may be too simplistic a view and likely incorrect. For one, if you look at FII flows data since the Fed decision, the selling has continued. Two, the US 10-year yields have continued to trend up after initially falling
Post the Fed decision. At current level of around 4.15 per cent, the risk-free bonds will continue to give competition to expensive Indian markets from a FII perspective.
Published on December 16, 2025
