There has been a good deal of chatter on the internet in the past few months regarding the liquidity shortage in the money market in the fourth quarter of 2019. If it didn’t register, that’s probably because it didn’t last very long and was only discussed by market cognoscenti and serial alarmists. In response to the sudden shortage of short-term financing, the Federal Reserve began buying large amounts of short-term Treasury bills. The funds for these purchases came, as they always do, out of thin air.
In the aftermath of the 2008 financial crisis, the Fed began purchasing large numbers of Treasury securities in a stated effort to reduce yields and stimulate the economy. (Whether or not this actually worked is still a subject of debate.) This initiative, termed Quantitative Easing or QE, went through three iterations before the Fed ended the program in 2015. However, the spectre of the central bank purchasing large amounts of Treasury debt, which looks very much like monetization with extra steps, has always raised the suspicions of among economists and monetary theorists. Hence, the sudden decision to restart Treasury purchases was dubbed QE 4, even as the Fed insisted that it was no such thing. So is this a big deal or not?Far be it from this commentary to unquestioningly support the mainstream view, but it does appear to us that the Fed is being reasonable here. If one bases one’s views on mere numbers, it does not seem that the situation is much out of the ordinary. If anything, the Fed’s recent purchases of short-term Treasuries is a return to its normal operations prior to 2008, when it customarily held about 15-20% of the government’s debt and used this to set short-term interest rates. It was only when Ben Bernanke began his QE programs to raise the Fed’s holdings of longer-term Treasuries at the expense of its short-term inventory that this amount fell, and for many years thereafter the Fed did not hold any short-term
As you can see, the Fed has maintained a constant holding of longer-term Treasury paper over the last five years, even as the outstanding debt has marched higher. The addition of a couple of hundred billion in short-term bills seems like a rounding error in the larger picture.
Let’s put it this way: the Federal Reserve now owns $2.3 trillion of a total Treasury debt held by the public of $17.3 trillion, or 13%.–a proportion at the low end of its historical range. We can hardly be accused of carrying water for the Federal Reserve in this commentary, but it does seem that in this instance the concern over “QE 4” is overdone.
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