The US monetary base rose to another new high in the week to Wednesday – see chart – but the forecast in a previous post of a further large increase into the spring is no longer valid because of a Treasury / Federal Reserve decision this week to expand the supplementary financing programme (SFP) from its current $5 billion to $200 billion.

Under the SFP, the Treasury issues additional Treasury bills and deposits the proceeds with the Fed. The expansion of the programme means that the Fed will be able to finance remaining purchases of mortgage-backed securities (MBS) without creating new bank reserves, included in the monetary base.

While the monetary base is unlikely to rise much further, the recent expansion may have a positive impact on markets near term. Financing MBS buying by issuing Treasury bills rather than creating reserves, moreover, arguably makes little difference – the transaction still results in an increase in market liquidity while bills may be bought by banks and regarded as a close substitute for reserves.

It would have been more straightforward for the Fed to have sterilised the monetary base impact of MBS purchases by other means, e.g. selling Treasury securities from its portfolio, conducting reverse repos or raising reserve requirements. Officials were presumably concerned that such actions would suggest a tightening of monetary policy so chose the more circuitous route of SFP expansion instead.