Karishma Vanjani

The Trump administration and the Federal Reserve appear to be flooding the financial system with liquidity, even as officials insist they aren't reviving 'quantitative easing.'

Quantitative easing, or QE as it's called, is an unconventional tool at the heart of the market debate. It refers to the Fed buying large amounts of longer-dated financial assets while keeping interest rates near rock-bottom, all with a single goal: to increase liquidity, stimulate borrowing, and boost investment. QE is usually used during recessions.

Technically, the latest actions on monetary and fiscal policy stemming from Washington don't carry the "QE" label, but investors say the outcome is similar: a flood of liquidity.

Comprehensively, "when you look at it it's like a trillion dollar of stimulus this year," said Daniel Clifton, head of policy research for Strategas Securities. But "I've never called it QE," he added, since neither interest rates are at zero, nor is the Fed buying longer-dated debt.

The bullish logic requires a bit of math. Two government-controlled mortgage giants, Freddie Mac and Fannie Mae, have just been ordered to buy up $200 billion in mortgage-backed securities $(MBS)$ by the president to force down mortgage rates and stimulate home buying. That follows moves to cut red tape and boost credit creation.

By passing the GENIUS Act in July and lowering the capital requirements for banks this year, the government has given major lenders the green light and space to invest more heavily in assets like Treasuries and cryptocurrencies.

Meanwhile, the Fed is "now easing with both hands on the pump," wrote Gavekal's Chief U.S. Economist Will Denyer last month.

The central bank started purchasing short-term U.S. debt or Treasury bills last month, and its balance sheet is noticeably expanding for the first time since 2022, outside the run-up seen in 2023 to rescue banks. When the central bank buys securities, it adds cash to the seller's reserve account held at the Fed, which pumps new money into the financial system. (Paying taxes has the opposite effect, draining liquidity).

The Fed, in aggregate, is estimated to purchase between $220 billion and $300 billion in the first year. It has already bought $54.43 billion in T-bills since Dec. 12. The third interest rate reduction enacted by the Fed last month further adds to the easy money narrative.

"In effect, the Fed handed investors a measured dose of quantitative easing for Christmas, signaling a policy mix that is now unmistakably tilted toward accommodation," Denyer wrote. Fed Chair Jerome Powell, in a press conference last month, said its actions don't constitute as quantitative easing.

The upshot? When there are interventions by the government and actions by the Fed that ease conditions, they add cash to the market that can flow to risky assets. The volume of buying firepower can make investors feel like there's a "floor" under asset prices, pushing them into markets even when valuations look stretched.

"Until something breaks probably [look for] higher stock prices at unsustainable valuations," wrote Michael Lewitt in The Credit Strategist newsletter shortly after Trump's decision on MBS buying. "All pretense of fiscal/monetary restraint is gone."

Extra money in the system can also rekindle inflation, so investors are watching the M2 money supply -- a rough gauge of how much cash is circulating in the system. While M2 is currently growing at over 4%, experts like Clifton suggest inflation risks only become serious if that growth hits 6% to 8%.

To be sure, Trump's moves underscore the Republican Party's effort to address affordability and boost the economy ahead of November's mid-term elections -- and some would say those goals can be achieved without the dangerous side effects that usually follow poorly timed, reckless government spending.

"Is the MBS purchase QE? In my opinion, the answer is no," said Tan Kai Xian, analyst at Gavekal. "In part because, the money is not 'printed out of thin air.' The Trump administration is simply reallocating resources under its control."

Essentially, the argument is that Fannie and Freddie are deploying existing reserves. Federal Housing Finance Agency Director Bill Pulte told Reuters that each entity holds nearly $100 billion in available funds. Same logic can be applied for the Fed that's swapping T-bills for cash -- trading one liquid asset for another.

Still, it is like QE -- at least in spirit -- as Trump is asking Fannie and Freddie to buy duration and add liquidity to the market, argues Mohit Kumar, chief economist & strategist for Europe at Jefferies.

Trump is also influencing one of the most "sticky" components of household budgets: Mortgages and rent. "Whether these steps succeed remains uncertain, but the intent to tackle energy, housing, and financing head-on is unmistakable," wrote Seth Meyer, portfolio manager at Janus Henderson.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 13, 2026 17:13 ET (22:13 GMT)

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