SchiffGold.com
Interest rate hikes get most of the attention as the Federal Reserve fights inflation, but balance sheet reduction is arguably more important. And it’s not going well.
Since the Fed stopped buying Treasuries and started letting bonds fall off its books as they mature, the bond market has experienced increasing volatility and liquidity problems. In fact, there is already talk about the possibility of the central bank abandoning quantitative tightening.
Since the Fed launched its first quantitative easing (QE) program in the wake of the 2008 financial crisis, it has purchased more than $8 trillion in US Treasury bonds and mortgage-backed securities.
In effect, the Fed monetized trillions of dollars in government debt, first in the wake of ’08 and then again during the pandemic. Through various QE programs, the Fed bought bonds with money created out of thin air, creating an artificial demand for Treasuries. Central bank bond buying holds the price up and keeps bond yields artificially low. This allows the US government to sell more bonds than it could without the Fed’s intervention. Without the Fed’s big fat thumb on the bond market, Uncle Sam would have a hard time maintaining its borrow and spend policies. Interest rates would rise too high to make further borrowing tenable.
That’s beginning to happen today.
