If you thought quantitative easing (QE) was dead and buried, you may soon be in for a shock.

The US Federal Reserve is preparing the ground for a rapid return to net bond purchases, deeming it necessary to ensure sufficient liquidity for the financial system.

Fed chairman Jerome Powell lowered the policy rate for the second time this year.Credit: Bloomberg

It will not be called QE. It will be deemed open market operations – TOMO or POMO in the obfuscating vernacular – and will be presented as a technical adjustment to manage bank reserves and the plumbing of the credit markets.

Krishna Guha and Marco Casiraghi from Evercore ISI expect the Fed to start mopping up a net $US35 billion ($53.5 billion) of US Treasury debt each month as soon as January, or March at the latest.

Mark Cabana, who managed QE at the New York Fed before joining Bank of America, says liquidity has dried up and the Fed will soon have to buy $US150 billion of debt to stabilise the money markets.

Can such action be justified amidst 3 per cent inflation, 3 per cent growth or more, a general government deficit of 7.4 per cent of GDP, and a galloping bull market on Wall Street?

There are arguments both ways, but this has potent implications for global asset prices. It is certain to set off a blistering controversy.

The Powell Fed announced on Wednesday that it will halt quantitative tightening (QT) next month as a first step. Traders focused instead on the separate issue of interest rates, dismayed by hawkish warnings from Jerome Powell that another quarter-point cut in December is not a “foregone conclusion”.

Markets may be missing the larger story. Professor Tim Congdon from the Institute of International Monetary Research said the Fed is aiding and abetting the monetisation of America’s deficits. “What on earth do they think they are doing?” he said.

Money supply growth may look moderate at first glance, but the true scale is disguised by a 15 per cent rise in US money........

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