As readers of this commentary are only too well aware, in the last eight months the Federal Reserve has flipped from a policy of raising interest rates to reducing them. In tandem with this, the much-ballyhooed reversal of the Treasury debt purchases that the Fed made during Quantitative Easing (QE) has also died a premature death.
Source: Federal Reserve Bank SOMA report
You remember the whole “the Fed is going to sell off the Treasuries it purchased during QE” story that was making the rounds a few years ago. The idea was that if the Fed didn’t shrink its historically large portfolio of US government debt, the soundness of the whole monetary system would be called into question. The Modern Monetary Theory (MMT) folks had pointed out that a compliant central bank purchasing government debt was akin to monetization, and to prove them wrong A Price Had to Be Paid for the deficit else the politicians would figure out they could simply spend money without any discipline from the bond market. But as you can see, that Quantitative Tightening (QT) concept was heavy on pitch and non-existent in performance. In fact, the Fed has been purchasing long-dated notes and bonds pretty much the whole time, keeping their position flat at roughly $550 billion even as some of their holdings become shorter than 10 years maturity with the passage of time.
At the same time, the continued growth in Treasury issuance has brought the percentage of long-term debt owned by the Fed back to near the 15% levels that prevailed before the QE experiment. This leaves the Fed plenty of room to engage in the QE/faux tightening cycle once more in the coming years. And in spite of continued trillion dollar annual deficits coexisting with record low bond yields, mainstream financial commentators still cling to the belief that Washington cannot spend money into existence absent market consequences. Perhaps the fact that it can is too horrifying for them to contemplate.
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