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The expected reduction in the Fed funds target rate was announced today. The target rate was lowered to a range between 3.50-3.75%. The Fed also announced that it will begin purchasing about $40 billion per month of short-dated Treasury bills starting December 12.

The announcement to purchase a significant amount of short-term Treasury securities every month might be more important than the interest rate reduction.

NEW YORK FED AND OMOs

The Trading Desk at the New York Federal Reserve is the operational unit that executes open market operations on behalf of the Fed — buying and selling securities via its primary dealers.

Open Market Operations (OMOs) include the purchase and sale of securities (mainly U.S. Treasury securities, agency debt, and agency MBS) in the open market by the Fed.

Per ChatGPT, OMOs "are the core mechanism by which the Fed adjusts the amount of reserves in the banking system to influence liquidity and interest rates."

Another way to say it is that OMOs allow the Fed to "steer" the federal funds rate to its desired range and maintain adequate reserves/liquidity in the system.

REASONS FOR CONCERN

Ordinarily, the Fed lends (repurchase agreements, called repos) or borrows (reverse repos) cash temporarily, often on an overnight basis. These actions are short-term oriented and intended to help keep rates stable and maintain liquidity.

This works when reserves are reasonably ample, or abundant. If not, stronger measures a necessary.

The purchase of "shorter-term Treasury securities" is a stronger measure. In other words, today's announcement is an indication that financial system liquidity is a big concern for the Fed. 

The Fed policy of higher rates for longer has had material effects on the bond and money markets that threaten the structural integrity of the financial system. Hence, expect more aggressive actions by the Fed to contain the damage.

Liquidity issues in the overnight money markets are likely prompting the Fed to take this action. The action is similar to the Fed's aggressive acquisition of long-dated securities in the bond market at the onset of the 2008 financial crisis, when credit markets imploded.

The purchase of Treasury bills is beginning as the Fed winds down its efforts to reduce the size of its balance sheet, which resulted from its 2008 accumulation. This time the focus of accumulation is on short-term securities.

By purchasing T-bills in the open market, the Fed is injecting needed reserves/liquidity into the system.

That implies that system liquidity is the primary concern, and not just for the Fed, but for investors, businesses, and individuals.

(also see System Liquidity Risk and Liquidity Problems Could Overwhelm Inflation's Effects )

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