Bloomberg News reports that the Federal Reserve has offloaded approximately $1 trillion of bond holdings belonging to it. It did so ever since it started working down the inflated balance sheet in the past year . There were no signs of any strains in the financial markets at that time. The last time the balance sheet was worked down. It had spooked the policymakers when they last saw the program.
What is the System Open Market Account?
The System Open Market Account is the name given to the portfolio of assets of the central bank. This amounts to approximately $7.4 trillion now. It was down from the record figure of $8.4 trillion attained in April last year. The data from the New York Fed show revealed the same.
As part of the monetary tightening campaign in decades, the Fed allows up to $60 billion of Treasuries. As far as the mortgage-backed debt maturity is considered, the amount is $35 billion each month without replacement.
These shrinking holdings have forced the Treasury Department to rely heavily upon the private sector to take up the federal debt. As such, so far, the money-market funds and the other buyers happy to snap up the slew of Treasury bills, Washington has been playing a crucial part in the ramp-up funding requirement. The issuance assumed made all bigger by the requirement for replenishing cash following the fight related to the debt limit.
What do experts say?
According to Blake Gwinn, who is associated with RBC Capital Markets as the head of US interest rate strategy, the debt-runoff of the Fed to date has been more or less painless. He said that this is the first time anyone has seen the bigger impact of QT in the marketplace while talking about quantitative tightening. This is the term that has been used for the balance sheet contraction of the Fed.
Bloomberg News reports the above scenario compares with what it was in 2019 when the money markets in the United States were deeply roiled in the first round of QT of the Fed. Then, the program ended by draining bank reserves, which caused scarcity. The same was admitted by Jerome Powell, the Fed Chair, at the Congressional hearing in June. This had blindsided the policymakers.
As the QT of the Fed keeps going, it will eat into the reserves, thereby imposing a process that will be more of a test on the markets. Yet another key dynamic comprises a decision by the Treasury to sell as it tries to cope with the expanding funding requirement. It is further propelled by the broadening fiscal deficit.
The high-yielding T bills are strongly in demand these days. However, the Treasury is lifting the sales of those securities that are longer dated since it has attracted attention to the debt trajectory of Washington.
