Sometimes the man sounds like a political hack and sometimes he sounds like a judicious and trustworthy counselor. The trick is to figure out which hat he's wearing on any given day.
From Bloomberg Opinion, March 26:
Why the Fed Wants to Keep More US Government Debt
It’s just making sure Congressional wrangling over the debt limit doesn’t destabilize interest rates.
The Federal Reserve has raised some questions with its recent decision to slow the pace at which it’s shrinking its more-than-$4-trillion pile of 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 decades, the Fed’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 Fed. 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 complicating things. 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 Fed, potentially adding hundreds of billions of dollars in reserves to the banking system. Later, when Congress agrees to increase the limit as it always has, the Treasury will replenish its Fed account, depleting reserves at a rapid pace that — if the level drops too low — could force banks to scramble for cash.
The Fed doesn’t want a repeat of September 2019, when a shortage of reserves caused interest rates to spike. It considers the current supply to be well above “ample,” the level required to ensure that short-term fluctuations in reserves don’t destabilize rates, but it can’t know precisely how much banks will need. Hence, out of an abundance of caution, to ensure that reserves remain plentiful as the Treasury rebuilds its cash balance, it’s adjusting the pace of quantitative tightening. Beginning next month, it’ll reduce the cap on the monthly runoff of its Treasury securities, to $5 billion from $25 billion. The cap on mortgage securities will remain the same, at $35 billion (though the actual runoff has been slower, at about $15 billion a month).
Granted, the Fed’s move will have a small marginal impact on the US government’s borrowing needs. Once the debt limit is raised, the Treasury will have to issue slightly less debt to replace the smaller run-off from the central bank. But it’s a pittance in the context of a budget deficit running at roughly $2 trillion annually. It should have no bearing on whether bond investors will freak out about America’s fiscal outlook, which I agree is dire. The implications for monetary policy are also negligible....
....MUCH MORE
Calm, judicious, well-reasoned.
