The Federal Reserve’s latest move to resume purchases of short-term Treasury bills under the banner of “reserve management purchases” (RMPs) has reopened an old debate: where does technical liquidity management end, and where does monetary stimulus begin? Officially, the Fed insists the operation is not quantitative easing (QE). Unofficially, the distinction looks increasingly blurred, especially when viewed through the lens of financial stability rather than narrow interest rate control.
At its core, the Fed’s argument is straightforward. Large US fiscal deficits, funded heavily through short-term Treasury issuance, drain liquidity from the financial system as cash flows into the Treasury General Account. When reserves become scarce, short-term rates can spike, repo markets can seize up, and leveraged players, particularly hedge funds running basis trades, may be forced into disorderly selling. RMPs, by replenishing bank reserves, are meant to keep short-term rates anchored to the policy target and prevent volatility. In that sense, they are framed as plumbing, not policy.
Yet function matters more than intent. By ensuring an “ample” level of reserves, the Fed is implicitly underwriting a system built on high leverage and heavy reliance on short-term funding. Whether the Fed buys long-term bonds to compress term premia (QE) or short-term bills to smooth money markets (RMPs), the effect is similar: the financial system is allowed to carry more debt, more leverage, and higher asset valuations than it otherwise could. The distinction is one of degree and transmission, not of kind.
This debate resonates beyond the US, and Kenya offers a useful contrast. Kenya’s financial system is far less leveraged, and its central bank operates with a much smaller balance sheet relative to GDP. Liquidity management by the Central Bank of Kenya (CBK) is largely conducted through repos, reverse repos, and open market operations aimed at aligning interbank rates with the policy rate. Crucially, Kenya does not have a deep, highly leveraged repo market dependent on hedge funds or complex basis trades. When liquidity tightens, the transmission is more direct: higher interbank rates feed into lending rates, government borrowing costs rise, and fiscal pressures become immediately visible.
This difference highlights an important point. In advanced economies like the US, central bank balance sheets have become structural features of market functioning. The Fed’s balance sheet, now around 20.0% of GDP, is considered “normal,” compared with under 10.0% before the global financial crisis. In Kenya, by contrast, there remains a clearer boundary between fiscal policy, market discipline, and central bank intervention. If government borrowing strains the market’s capacity, yields adjust upward quickly, sending a signal, sometimes painfully, to policymakers.
That does not mean Kenya’s framework is superior in all respects. It is more exposed to volatility, capital flow reversals, and financing shocks. But it does suggest that the US system has evolved into one where market signals are increasingly dampened by central bank action. As critics argue, RMPs may not be labelled QE, but they still socialize liquidity risk and smooth over fiscal-market tensions.
The uncomfortable conclusion is that there is no bright line separating reserve management from monetary stimulus. Both are mechanisms for sustaining a debt-heavy system. Kenya’s experience shows what a system with less balance-sheet activism looks like, rougher at the edges, but arguably more transparent. The US, by contrast, has chosen stability through constant liquidity support, even if that means living permanently close to the QE frontier.
