QE or not QE?

That is the question that commentators and even bankers at JPM are answering, declaring that the Fed’s discount window is equivalent to QE. IMO this is incorrect. QE is the open market purchase of Treasury securities and agency MBS for the explicit purpose of supporting or raising the price of said securities, thereby manipulating interest rates. Borrowing at the discount window with Treasury or MBS collateral does not involve any purchase or sale of the securities, they remain as assets of the borrower. Therefore not QE, just the Fed acting as lender of last resort. The accounting is the same in principle as any secured debt.

It is true that the borrowing increases the Fed’s balance sheet, whence comes the yammering about QE. The debt is an asset to the Fed, a liability to the borrower. The proceeds of the debt are an asset to the borrower and a liability to the Fed (reserves). The borrower is provided with additional reserves – liquidity – but no “money” is created as Fed reserves are not included in either M1 or M2. The debt to the Fed is not a deposit.

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