How to understand "Trump-style QE"? Investors: The era of liquidity has arrived, "all disguises of fiscal/monetary tightening have disappeared"

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

According to Barron's on Wednesday, the Trump administration has just ordered the two government-controlled mortgage giants, Freddie Mac and Fannie Mae, to purchase $200 billion in mortgage-backed securities (MBS) to lower mortgage rates and stimulate homebuying demand. Meanwhile, the Federal Reserve has purchased $54.43 billion in short-term Treasury bonds since last December, marking the first significant expansion of its balance sheet since 2022.

Daniel Clifton, head of policy research at Strategas Securities, stated, "Overall, the scale of stimulus this year is equivalent to $1 trillion." Michael Lewitt of the investment newsletter The Credit Strategist wrote after Trump's announcement of the MBS purchase decision, "All disguises of fiscal/monetary tightening have vanished."

These measures come as the Trump administration attempts to address affordability issues and boost the economy ahead of the midterm elections in November, but investors warn that the additional funds in the system could reignite inflation and push up asset prices that are already overvalued.

Policy Combination Constitutes "De Facto QE"

Although technically not meeting the definition of quantitative easing, a series of monetary and fiscal policy actions in Washington are producing similar effects. Quantitative easing typically refers to the Federal Reserve's large-scale purchase of long-term financial assets when interest rates are near zero to increase liquidity, stimulate borrowing, and investment, a tool usually employed during economic recessions.

Current interest rates are not at zero, and the Federal Reserve has not purchased long-term bonds, so Clifton stated he has never referred to it as QE. However, Will Denyer, chief U.S. economist at Gavekal, wrote last month that the Federal Reserve is now fully easing its policies.

Since December 12 of last year, the Federal Reserve has purchased $54.43 billion in short-term Treasury bonds, with first-year purchase estimates ranging between $220 billion and $300 billion. When the central bank buys securities, it injects cash into the seller's reserve account at the Federal Reserve, thereby injecting new funds into the financial system. The third interest rate cut implemented by the Federal Reserve last December further reinforced the narrative of loose monetary policy.

Federal Reserve Chairman Jerome Powell stated at a press conference last month that these actions do not constitute quantitative easing. However, Denyer wrote that, in reality, the Federal Reserve provided moderate quantitative easing to investors at Christmas, with policy signals clearly leaning towards easing.

$200 Billion MBS Purchase Plan Sparks Controversy

Trump's order for Fannie Mae and Freddie Mac to purchase $200 billion in MBS is a core part of the policy combination. Bill Pulte, director of the Federal Housing Finance Agency, told Reuters that both agencies hold nearly $100 billion in available funds each Gavekal analyst Tan Kai Xian believes: “Is MBS purchasing QE? I think the answer is no. Part of the reason is that this money is not 'printed out of thin air.' The Trump administration is simply reallocating resources under its control.” This logic also applies to the Federal Reserve exchanging cash for short-term government bonds—it's just swapping one liquid asset for another.

However, Jefferies' Chief European Economist and Strategist Mohit Kumar argues that this is at least spiritually similar to QE, as Trump has asked Fannie Mae and Freddie Mac to purchase duration assets and inject liquidity into the market. Janus Henderson portfolio manager Seth Meyer wrote that whether these measures will be successful remains uncertain, but the intention to directly address energy, housing, and financing issues is clear.

Trump is also impacting one of the most "stubborn" components of household budgets: mortgages and rents.

Regulatory Easing Releases 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 this year's reduction of bank capital requirements, the government has provided major lending institutions with greater leeway to invest more in assets such as government bonds and cryptocurrencies.

These measures, combined with MBS purchases and the expansion of the Federal Reserve's balance sheet, constitute a multi-faceted liquidity injection mechanism. When government intervention and Federal Reserve actions ease financial conditions, the cash they inject into the market may flow into risk assets.

Liquidity Flooding Raises Valuation Risks

The massive purchasing power may lead investors to feel that asset prices have a "bottom support," pushing them into the market even if valuations appear overstretched. Lewitt wrote after Trump announced the MBS purchase decision: “Before something collapses, we may see stock prices rise to unsustainable valuation levels.”

The additional funds in the system may also reignite inflation, so investors are keeping an eye on the M2 money supply—a rough indicator of the amount of cash circulating in the system. Although the current growth rate of M2 exceeds 4%, experts like Clifton believe that inflation risks only become serious when the growth rate reaches 6% to 8%.

However, some analysts believe that Trump's measures can achieve their goals without the dangerous side effects typically associated with improper timing and reckless government spending. Tan Kai Xian points out that Fannie Mae and Freddie Mac are deploying existing reserves rather than creating new funds.

But for the market, regardless of the technical definitions, the actual effects of liquidity have already manifested. The Republican Party is working to address affordability issues and boost the economy ahead of the midterm elections, and the ultimate impact of this liquidity feast remains to be seen