QE May Be Over, But the Feds U.S. Debt Hoard Is About to Soar
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The Fed’s balance sheet is set to expand significantly, with Treasuries holdings expected to double from $2tn to $4.4tn by the end of the decade, according to Wells Fargo estimates @LizMcCM
".... Chair Jerome Powell has said the Fed was never likely to get the size of its balance sheet back down to pre-crisis levels.But what officials haven’t really detailed is how large it will grow and how much U.S. debt the central bank will gobble up. The Fed will have around $2 trillion in Treasuries by year-end. By mid-2020 though, most Wall Street dealers expect the bank to start accumulating Treasuries once again, à la QE. And by the end of the coming decade, it will have more than doubled its holdings of the debt to roughly $4.4 trillion, leaving the overall size of its balance sheet close to $5 trillion, a Wells Fargo estimate showed. (Its MBS holdings will shrink from over $1.4 trillion to under $400 billion in that span.) Next year alone, TD’s Misra expects the Fed will purchase about $300 billion of Treasuries from the open market, or roughly 30% of the over $1 trillion that the U.S. is forecast to issue to cover its ballooning deficit. That’s in addition to the nearly $300 billion of maturing Treasuries the Fed will replace by buying directly from the government. What the Fed buys matters. Officials have said they may skew purchases toward shorter maturities, but no final plan has been set. The Fed holds no T-bills after swapping them out earlier this decade to drive down longer-term yields. Bill purchases could help lower short-term funding costs and widen the gap between 3-month and 10-year rates -- a key bond-market recession indicator -- after that part of the yield curve sporadically inverted since March, says Margaret Steinbach, a fixed-income investment specialist at Capital Group. “As part of normalization, we will have to decide what the maturity structure should be in the longer term,” Powell said at a May 1 press conference. So why exactly is the Fed getting back into the business of buying bonds? Part of it simply has to do with accounting. While attention has been focused on the asset side of the Fed’s balance sheet, it also has liabilities, which mainly come in the form of currency in circulation and bank reserves. As with any balance sheet, the two sides need to net out. Since those liabilities tend to naturally increase over time with the economy, so too must the Fed’s assets. It was this balancing act that prompted some on Wall Street to say the QE unwind was creating reserve scarcity. That by shrinking its asset base, the Fed squeezed reserves as currency grew on the liability side of its ledger. Lorie Logan, a key New York Fed official, said in April it’s monitoring indicators for changes in reserve conditions. Once the Fed decides the banking system has an appropriate level of reserves, it will need to start buying Treasuries again. Morgan Stanley’s Matthew Hornbach, who estimates the Fed will buy about $278 billion of Treasuries from the open market next year, says a third of that will be needed to prevent currency growth from squeezing bank reserves. Post-crisis regulations to curb financial risk-taking, as well as the fact the Fed pays interest on excess reserves as a policy tool, have also prompted banks to hold far more cash than before. That all suggests the Fed likely will keep growing its asset base -- indefinitely -- by continually buying Treasuries..."
Liz McCormick and Alex Harris, "QE May Be Over, But the Fed’s U.S. Debt Hoard Is About to Soar,"Bloomberg, May 21, 2019, https://www.bloomberg.com/news/articles/2019-05-21/qe-may-be-over-but-the-fed-s-u-s-debt-hoard-is-set-to-double
