What will the Fed do will $4 Trillion in bonds?

What will the Fed do with the $4 Trillion in bonds it owns as part of it's economic recovery plan?

August 2018

What will the Fed do with $4 Trillion in bonds?

Here’s what I learned about the $4 plus trillion on the Fed’s balance sheet:

·         The Fed has no intentions to sell any of the bonds they own, they are simply going to let them roll off as they mature (that’s public knowledge),

·         They carry the bonds on their books at par. There is no market-to-market gains or losses posted.  The Fed collects interest from the Treasury on those bonds, pays a few expenses and sends the excess back to the Treasury,

·         The bonds are carried as an asset on the Fed’s books (a government entity) and a liability on the Treasury’s books (a government entity),

·         So at maturity, the Fed and the Treasury both pull out a big eraser and poof the entries on the government books offset and evaporate away. A great gig if you can get it…

·         That’s the plan…

So effectively, the Fed is not implementing QT by selling bonds it owns.  They are simply raising interest rates.  Forget the bonds on their balance sheet.  They are essentially set out to pasture and will evaporate when they mature.

So the old bonds simply go away.   But at the same time they are not replacing them as they were doing, so pushing yields down and prices up. 

The Fed’s bond buying helped send interest rates lower and bond prices higher, much of the liquidity remained trapped on the Fed’s books (the banks deposited their proceeds back on reserve at the Fed) so it didn’t find its way into the economy as stimulus.  The banks could have lent more but regulations were changed reducing their leverage ratios and borrowers had little appetite to borrow more.  So net-net not stimulative to the system.  



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