Federal Reserve US Treasury Holdings Pass The $1 Trillion Mark

– Quantitative Easing Explained

Jan. 30 (Wall Street Journal) — The Federal Reserve has passed yet another milestone on its journey into uncharted territory: Its average holdings of longer-term Treasurys have passed the $1 trillion mark.

Prior to the financial crisis, the Fed tended to hold up to $700 billion in Treasurys, two-thirds of which typically had a longer term than a year. But thanks largely to its $600 billion bond-buying program, left unchanged at the Fed’s meeting last week, Treasury holdings have ballooned. Earlier in January total Treasury holdings, including short-term bills, passed the $1 trillion mark. Last week the Fed’s holdings of longer-term U.S. debt, notes and bonds—those with a term of more than a year—averaged $1.022 trillion.

And even if the Fed’s bond-buying program ends as planned in June, the Fed may have to keep purchasing significant amounts of Treasurys for some time. If it did nothing, about $200 billion to $300 billion in Treasurys and mortgage-backed securities would mature annually starting in 2012, estimates Lou Crandall, chief economist at Wrightson ICAP.

That would amount to a de-facto tightening of monetary policy, which could pose challenges should the recovery again sputter. (There is NO recovery. ‘Recovery is The Greatest Depression’ and ‘War is Peace’.)

Investors will also have to consider other possibilities. Should inflation become a threat, the Fed may be forced to sell some of its holdings. That was one option noted in a speech this month by Fed Vice Chair Janet Yellen.

But any indication that the Fed could begin selling would likely roil bond markets as investors try to beat it to the exit. The bigger its portfolio of longer-term Treasury holdings, the greater that worry becomes.

By DAVID REILLY
JANUARY 30, 2011, 2:18 P.M. ET

Source: The Wall Street Journal