To The Moon

There have been some article and also a growing discussion in financial circles about whether the Federal Reserve is "quietly deploying QE" (Quantitative Easing) or "stealth QE," even as it ostensibly continues its quantitative tightening (QT) policy.

In this article, I would like to analyse whether this is the situation and what are the things we as investors can look out for.

1. The "Stealth QE" Argument

Recent Bond Purchases: Several reports, particularly from May 2025, highlight significant, unannounced purchases of U.S. Treasury bonds by the Fed. For instance, one report noted the Fed "vacuumed up $43.6 billion in U.S. Treasurys" over four days in mid-May, including $8.8 billion in 30-year Treasurys on May 8. Another mentioned a $20 billion purchase of 3-year Treasury bonds in a single day around May 9.

Lack of Transparency: Critics of the Fed's actions argue that these purchases are happening without the usual public announcements, press conferences, or widespread media coverage that typically accompany QE. This lack of transparency is what gives it the "stealth" moniker.

Addressing Unsold Auctions: One key reason cited for these quiet purchases is the U.S. Treasury's struggle to sell its debt in recent auctions. For example, a May 9, 2025, Treasury auction reportedly sold only $78 billion of a $150 billion offering, leaving a substantial shortfall. The Fed's purchases are seen as stepping in to cover some of this shortfall, preventing a spike in yields that could destabilize markets.

Liquidity Concerns: Some analysts suggest that the Fed doesn't make sudden, large purchases of this kind unless there's significant liquidity stress within the financial system. These actions could be interpreted as the Fed injecting liquidity to maintain market stability without openly admitting to potential underlying economic fragility or excessively high interest rates.

Reversal of QT's Impact: While the Fed is still technically engaged in QT (reducing its balance sheet by allowing maturing bonds to run off), these new purchases could be seen as effectively offsetting some of the intended tightening, or even reversing it in specific segments of the bond market.

2. The Counter-Argument: "Less QT" vs. "QE"

Slowing QT Pace: The Fed officially announced at its March 2025 monetary policy meeting that it would begin slowing its rate of QT. Specifically, it reduced the monthly cap on Treasury security runoff from $60 billion to $25 billion (and later to $5 billion for Treasuries while keeping MBS runoff at $35 billion). Some argue that the recent bond purchases are simply part of this reduced pace of tightening, where the Fed is reinvesting a larger share of maturing bonds to avoid rapid balance sheet reduction, rather than actively expanding its balance sheet through new QE.

Maintaining "Ample Reserves": The Fed has stated its intention to maintain an "ample reserves" regime in the banking system. As the balance sheet shrinks through QT, bank reserves decline. If reserves fall too low, it can lead to volatility in short-term rates (as seen in 2019). The current actions could be viewed as managing reserve levels to prevent such disruptions, which is a market functioning concern rather than a broad monetary stimulus.

Balance Sheet Management vs. Monetary Policy: Some Fed officials and analysts view the balance sheet as somewhat independent of the direct interest rate policy. They argue that the Fed could potentially be cutting rates while continuing QT, or even hiking rates with QE, if needed to address market functioning and inflation simultaneously.

3. What to Watch For

Fed's H.4.1 Report: The Federal Reserve's H.4.1 report (Factors Affecting Reserve Balances) provides a weekly consolidated statement of the Federal Reserve Banks' condition, including changes in their asset holdings. Closely monitoring this report is key to understanding actual balance sheet movements. While recent reports in May 2025 show some decreases in total assets and Treasury holdings, the timing and nature of specific purchases (like the large, unannounced ones) are what fuel the "stealth QE" narrative.

Here is the detailed analysis which might help us to understand much better.

1. Continued Quantitative Tightening (QT), but at a Slower Pace:

• Total Assets: The most prominent figure is the total assets held by all Federal Reserve Banks, which decreased slightly to $6.689 trillion for the week ending May 21, 2025, down from $6.713 trillion the previous week. This continues the trend of quantitative tightening (QT), where the Fed is reducing the size of its balance sheet by allowing maturing securities to run off without reinvesting the proceeds.

• Year-over-year Comparison: The total assets are significantly down from $7.304 trillion one year ago (May 22, 2024), representing an 8.43% decline. This confirms the ongoing nature of QT.

• Slowing Pace of Runoff: While the balance sheet is still shrinking, the rate of decline has been less aggressive than in previous periods of QT. This aligns with the Fed's announcement at its March 2025 FOMC meeting to slow the pace of runoff for Treasury securities (from $60 billion to $25 billion per month) while keeping the cap for mortgage-backed securities (MBS) runoff at $35 billion. The goal is to ensure that reserves remain "ample" and to avoid potential money market disruptions, as seen in 2019.

2. Key Asset Categories:

• U.S. Treasury Securities: This remains the largest component of the Fed's assets. While the aggregate figure for Treasury holdings in the H.4.1 for May 21 isn't immediately detailed in the provided snippets for the latest week, previous data (e.g., May 14, 2025) showed Treasury securities at around $4.216 trillion. The general trend is a gradual reduction in these holdings as they mature.

• Mortgage-Backed Securities (MBS): Similarly, MBS holdings continue to decline as they mature and are not fully reinvested. Previous data (e.g., May 14, 2025) indicated MBS holdings around $2.173 trillion.

• Bank Term Funding Program (BTFP): The H.4.1 report for May 21, 2025, shows that the Bank Term Funding Program (BTFP) stands at $0, indicating that the program has effectively wound down as expected. This program, launched in March 2023 to provide liquidity to banks, had already seen its expiration in March 2025. Its zero balance indicates less need for emergency liquidity from this specific facility.

• Loans to Depository Institutions: This category, which includes primary, secondary, and seasonal credit, has significantly decreased year-over-year. For the week ending May 21, 2025, total loans were $3.693 billion, down from $114.956 billion a year ago. This reflects a more stable banking system and reduced reliance on the Fed's liquidity facilities compared to the peak of the banking stresses in early 2023.

3. Key Liability Categories:

• Reserve Balances of Depository Institutions: This is a crucial indicator of system liquidity. While the exact figure for May 21, 2025, is not directly stated as a consolidated number in the provided snippets for the latest release, this line item is the balancing figure on the liabilities side. As the Fed shrinks its assets through QT, reserve balances typically decline. The Fed's objective is to reduce reserves to an "ample" level without causing undue stress in the money markets.

• Currency in Circulation: This continues to be a large and stable liability, showing a slight increase to $2.384 trillion for the week ending May 21, 2025, up from $2.383 trillion last week and $2.347 trillion a year ago.

• Reverse Repurchase Agreements (ON RRP): Balances in the overnight reverse repurchase agreement (ON RRP) facility have been a significant liability for the Fed. For the week ending May 21, 2025, these were $519.213 billion, down from $524.554 billion last week and significantly lower than $827.210 billion a year ago. The decline in ON RRP balances is generally seen as a positive sign, as it indicates liquidity moving back into the banking system (increasing reserve balances) rather than being parked at the Fed.

4. Implications and Broader Context:

• Liquidity Management: The H.4.1 report highlights the Fed's ongoing efforts to manage financial system liquidity as it continues QT. The slower pace of runoff and the decline in the ON RRP facility suggest a transition to a more stable liquidity environment, with more reserves potentially moving into the banking system.

• "Stealth QE" Debate: While the overall balance sheet continues to shrink, discussions around "stealth QE" or specific large purchases of Treasury bonds in the past few weeks (e.g., to address unsold auctions) are not explicitly detailed in the aggregate H.4.1 figures. These specific actions would be reflected in the underlying asset categories over time, but the overarching trend in the H.4.1 report for May 21, 2025, still indicates a shrinking balance sheet in line with QT.

• Financial Stability: The significantly lower figures for emergency lending facilities (like the BTFP and loans to banks) indicate a healthier financial system compared to periods of stress.

• Monetary Policy Implications: The H.4.1 report is a backward-looking summary. While it reflects the technical implementation of monetary policy, it doesn't directly signal future interest rate decisions. However, the trends in reserves and liquidity are crucial inputs for the FOMC's assessments of financial conditions and economic health.

The Fed's H.4.1 report for 21 May 2025, confirms the continuation of quantitative tightening, albeit at a measured pace. The notable winding down of emergency liquidity facilities and the decline in the ON RRP facility suggest a more normalized and stable liquidity environment in the banking system. The focus remains on managing the balance sheet to maintain ample reserves without disrupting money markets.

Market Perception: The market's interpretation of these actions is crucial. If investors perceive these moves as a hidden form of easing, it could influence asset prices (e.g., boosting gold, Bitcoin, and commodities) and potentially signal underlying concerns about economic strength.

Official Statements: While the "stealth" nature implies a lack of formal announcements, any future comments from Fed officials regarding balance sheet operations or liquidity conditions could shed more light.

How We Can Navigate Either A Stealth QE or Slower Pace QT With Our Portfolios

The discussion around "stealth QE" or a slower pace of Quantitative Tightening (QT) from the Federal Reserve implies a subtle shift in monetary policy that can have significant implications for investors. While not an official return to aggressive quantitative easing, any action that injects more liquidity into the financial system or reduces the rate at which it's being withdrawn can be interpreted as a more accommodative stance.

Here is how investors can navigate such an environment using stocks and ETFs:

Understanding the Impact of Increased Liquidity / Slower QT:

Lower Interest Rates (potentially): While the Fed might not be cutting the federal funds rate, a slower pace of QT or stealth QE can put downward pressure on longer-term Treasury yields. This happens because the Fed is either buying more bonds than expected or allowing fewer to run off, increasing demand for bonds and thus lowering their yields. Lower yields can make other assets, like stocks, more attractive.

Asset Price Inflation: Increased liquidity in the system can find its way into various asset classes, potentially inflating asset prices (stocks, real estate, commodities). This is because investors, facing lower returns on safe assets like bonds, may seek higher returns in riskier investments.

Weakening Dollar (potentially): A more accommodative monetary policy can lead to a weaker dollar, which can benefit certain investments.

Risk-On Sentiment: Generally, more liquidity and lower rates foster a "risk-on" environment, encouraging investment in growth-oriented assets.

Investment Strategies for Stocks and ETFs

Given these potential impacts, here are some strategies and sectors to consider:

Growth Stocks (especially Technology and Innovation):

Rationale: In a lower-interest-rate environment (or one where rates are less restrictive than feared), growth stocks, particularly in technology, often perform well. Their future earnings are discounted at a lower rate, making them more valuable. Companies with strong innovation, high growth potential, and pricing power can thrive. How to Play: Individual Stocks: Focus on established tech giants (e.g., Apple, Microsoft, Google, $Amazon.com(AMZN)$) as well as promising companies in emerging technologies (AI, cloud computing, cybersecurity). ETFs: Technology Sector ETFs: e.g., $Technology Select Sector SPDR Fund(XLK)$ , VGT (Vanguard Information Technology ETF).

Innovation/Growth ETFs: e.g., ARKK (ARK Innovation ETF) (though higher risk), QQQ (Invesco QQQ Trust) which tracks the Nasdaq 100.

Cyclical and Value Stocks (with Caution):

Rationale: If the Fed's actions are indeed a sign of underlying economic concerns or a move to stimulate growth, cyclical sectors (e.g., industrials, consumer discretionary) might benefit from improved economic activity. However, if the "stealth QE" is primarily about market stability rather than strong economic growth, their performance might be mixed. How to Play: Individual Stocks: Look for companies with strong balance sheets and established market positions in cyclical sectors. ETFs: Cyclical Sector ETFs: e.g., XLI (Industrial Select Sector SPDR Fund), XLY (Consumer Discretionary Select Sector SPDR Fund). Value ETFs: e.g., SPYV (SPDR Portfolio S&P 500 Value ETF).

Commodities and Materials:

Rationale: Increased liquidity and potential inflationary pressures (if the Fed's actions lead to higher inflation) can drive up commodity prices. A weaker dollar also makes dollar-denominated commodities cheaper for foreign buyers.

How to Play: Commodity ETFs: e.g., GSG (iShares S&P GSCI Commodity-Indexed Trust), DBC (Invesco DB Commodity Index Tracking Fund).

Precious Metals ETFs: e.g., $SPDR Gold Shares(GLD)$ , IAU (iShares Gold Trust) for gold, and $iShares Silver Trust(SLV)$ for silver, as traditional inflation hedges and safe havens in uncertain times. Mining Stocks/ETFs: e.g., GDX (VanEck Gold Miners ETF).

Real Estate (REITs):

Rationale: Lower interest rates can benefit real estate by making mortgages cheaper and increasing property values. REITs (Real Estate Investment Trusts) can offer exposure to this sector.

How to Play: REIT ETFs: e.g., $Vanguard Real Estate ETF(VNQ)$ XLRE (Real Estate Select Sector SPDR Fund).

Summary

While the Federal Reserve has clearly stated its intention to continue quantitative tightening (albeit at a slower pace), recent unannounced, large-scale bond purchases have led some to believe the Fed is engaging in a form of "stealth QE." This is likely driven by a combination of factors:

Addressing stresses in the Treasury market (e.g., covering unsold auctions).

Managing liquidity in the financial system to prevent disruptions.

The desire to avoid spooking markets by formally announcing a shift back to QE, which could be interpreted as an admission of economic weakness.

Ultimately, whether it's truly "QE" or simply "less QT" (or a hybrid of market functioning operations), the key takeaway is that the Fed's actions are having an impact on market liquidity and bond yields, and these under-the-radar moves are being closely scrutinized by savvy investors.

Appreciate if you could share your thoughts in the comment section whether you think it is a good time to balance our portfolio with Growth Stocks, Commodities and Materials and Real Estate (REITs) stocks or ETFs?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.