Why is the US Fed about to slow its bond offloading down?
Subscribe to enjoy similar stories. The United States Federal Reserve has raised some questions recently, since it has decided to slow the pace at which it is shrinking its pile of over $4 trillion Treasury securities. For example: Is it merely preparing for an adjustment to the federal debt limit, or is it trying to avert a crisis in the US government bond market? With apologies for dampening the drama, I’m going with the mundane explanation.
Over the past couple of decades, the Federal Reserve’s holdings of Treasury and mortgage securities have played a crucial role in monetary policy. After the 2008 financial crisis, and during the global pandemic, its asset purchases—known as ‘quantitative easing’—pushed down long-term interest rates and increased the reserves that banks held at the Federal Reserve. Since March 2022, it has been unwinding that stimulus, allowing its holdings to run off gradually with the aim of reaching the level of reserves banks need to satisfy their liquidity needs, with a buffer above that for safety.
Now, though, the impending Congressional fight over raising the federal debt limit is making things complicated. When the government hits the limit, it can’t borrow to finance deficit spending. To make payments, the Treasury will have to draw down its balance at the Federal Reserve, potentially adding hundreds of billions of dollars in reserves to the banking system.
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