Fed’s Debt Runoff Is ‘Painless’ at $1 Trillion Mark, With Bigger Test Ahead
The Federal Reserve has sold about $1 trillion of its bond holdings without causing strains in financial markets, as part of its balance sheet reduction program.
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Posted 9/5/2023, 7:30:14 PM
yahoo.com
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US bond-market selloff continues as resilient economy prompts investors to anticipate elevated interest rates even after the Federal Reserve finishes its hikes, leading to a 16-year high in 10-year yields and increased inflation expectations.
Global financial companies have sold $2 trillion worth of bonds in a record amount of time this year, with European lenders paying off central bank loans and Chinese firms strengthening their balance sheets amidst economic uncertainty.
Japanese and Chinese central banks have significantly reduced their holdings of US Treasury bonds, making it less likely that their interventions in the foreign exchange market would disrupt global markets or strike fear into bond investors.
A new analysis suggests that the Federal Reserve should be prepared for unlimited bond purchases in order to prevent the U.S. Treasury market from seizing up during future crises, as it did at the beginning of the COVID-19 pandemic.
The Federal Reserve may need to pause its balance sheet reduction to maintain stability in the banking system as the US Treasury borrows heavily in the bills market, according to the St. Louis Fed.
The Federal Reserve has issued private warnings to several banks with assets of $100 billion to $250 billion, focusing on capital, liquidity, technology, and compliance.
The Federal Reserve's quantitative tightening program, which involves reducing its balance sheet, has not had a significant impact on the market so far, as private sector participants have taken over its role in the Treasury market; however, there is still a risk to banking reserves if money market funds stop buying T-bills.
The Federal Reserve has surpassed $100 billion in losses, and experts predict that the losses could potentially double before they start to decrease, as the central bank continues to pay out more in interest costs than it earns from bonds and financial sector services.