How should we understand "Trump-style QE"? Investors: The era of abundant liquidity has arrived; all pretense of fiscal/monetary tightening has disappeared.

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The Trump administration and the Federal Reserve are injecting massive liquidity into the financial system. Although officials insist this is not quantitative easing (QE), investors believe its effect is no different from QE. From Trump ordering the purchase of $200 billion in mortgage-backed securities, to the Fed restarting balance sheet expansion, to easing bank capital requirements, a series of policy combinations is creating a liquidity feast.

According to a Barron’s report on Wednesday, the Trump administration has just instructed mortgage giants Fannie Mae and Freddie Mac, which are under government control, to buy $200 billion in mortgage-backed securities (MBS), aiming to lower mortgage rates and stimulate housing demand. At the same time, the Fed has purchased $54.43 billion in short-term Treasuries since last December, marking the first significant balance sheet expansion since 2022.

Daniel Clifton, head of policy research at Strategas Securities, said, “Taken together, the stimulus this year is equivalent to a trillion dollars.” Michael Lewitt, author of the investment newsletter The Credit Strategist, wrote after Trump announced the MBS purchase: “All the disguises for fiscal/monetary tightening have evaporated.”

These moves come as the Trump administration seeks to address affordability issues and boost the economy ahead of the November midterm elections. However, investors warn that the extra funds in the system could reignite inflation and push up already overvalued asset prices.

Policy Combination Constitutes “De Facto QE”

Although technically not meeting the definition of quantitative easing, a series of monetary and fiscal policy actions from Washington are having similar effects. QE usually refers to the Fed buying large amounts of long-term financial assets when interest rates are near zero, to increase liquidity, stimulate lending and investment—a tool typically used during economic recessions.

Currently, rates are not near zero, nor is the Fed buying long-term bonds, so Clifton says he has never called this QE. But Gavekal chief US economist Will Denyer wrote last month that the Fed is now fully easing policy.

Since December 12 last year, the Fed has bought $54.43 billion in short-term Treasuries, with the first year’s purchase estimated between $220 billion and $300 billion. When the central bank buys securities, it injects cash into the sellers’ reserve accounts at the Fed, introducing new funds into the financial system. The Fed’s third rate cut last December further reinforced the narrative of monetary loosening.

Fed Chair Powell said at a press conference last month that these actions do not constitute quantitative easing. But Denyer wrote that, in practice, the Fed offered investors moderate QE at Christmas, with a clear policy signal toward easing.

$200 Billion MBS Purchase Plan Sparks Debate

Trump’s order for Fannie Mae and Freddie Mac to buy $200 billion in MBS is a core part of the policy mix. Federal Housing Finance Agency Director Bill Pulte told Reuters that each agency holds nearly $100 billion in available funds.

Gavekal analyst Tan Kai Xian believes: “Is MBS purchasing QE? I believe the answer is no. Partly because this money is not ‘created out of thin air.’ The Trump administration is simply reallocating resources under its control.” This logic also applies to the Fed swapping short-term Treasuries for cash—just exchanging one liquid asset for another.

But Jefferies’ European chief economist and strategist Mohit Kumar argues this is at least spiritually similar to QE, because Trump is asking Fannie Mae and Freddie Mac to buy duration assets and inject liquidity into the market. Janus Henderson portfolio manager Seth Meyer wrote that whether these moves will succeed is still uncertain, but the intention to address energy, housing, and financing issues is clear.

Trump is also targeting one of the most “stubborn” parts of household budgets: mortgages and rents.

Relaxed Bank Regulation Frees Up Credit Space

In addition to direct asset purchases, the government is also stimulating credit creation by easing regulations. Through the GENIUS Act passed in July and reduced bank capital requirements this year, the government is providing primary lenders with greater capacity to invest more in Treasuries, cryptocurrencies, and other assets.

Combined with the MBS purchases and Fed balance sheet expansion, these measures form a multi-pronged mechanism for injecting liquidity. When government intervention and Fed actions loosen financial conditions, the cash flowing into the market can be diverted to risk assets.

Liquidity Glut Raises Valuation Risks

Massive purchasing power may give investors the sense of a “floor” under asset prices, driving them into the market even when valuations already seem high. After Trump announced the MBS purchase, Lewitt wrote: “We could see stock prices rise to unsustainable valuation levels before something breaks.”

The extra funds in the system could also reignite inflation, so investors are watching M2 money supply—a broad measure of cash in circulation. While M2 is currently growing at over 4%, experts such as Clifton believe that only when the growth rate reaches 6% to 8% does inflation risk become acute.

However, some analysts believe that Trump’s actions can achieve their goals without the dangerous side effects that usually come with ill-timed or reckless government spending. Tan Kai Xian points out that Fannie Mae and Freddie Mac are deploying existing reserves rather than creating new money.

But for the market, regardless of technical definitions, the actual effect of liquidity is already being felt. Republicans are striving to address affordability and boost the economy before the midterm elections, but the ultimate impact of this liquidity feast remains to be seen.

Risk Warning and DisclaimerThe market has risks, and investment should be cautious. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Invest accordingly at your own risk.

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