Fed’s Debt Runoff Is ‘Painless’ at $1 Trillion Mark, With Bigger Test Ahead
The Federal Reserve has now offloaded about $1 trillion of its bond holdings since it began working down its bloated balance sheet last year, with no sign of the kinds of strains in financial markets that spooked policymakers the last time they oversaw such a program.
The System Open Market Account — the name for the central bank’s portfolio of assets — amounts to about $7.4 trillion now, down from the record $8.4 trillion reached in April last year, data from the New York Fed show. As part of its steepest monetary-tightening campaign in decades, the Fed is letting up to $60 billion of Treasuries and $35 billion of mortgage-backed debt mature each month without replacement.
Those shrinking holdings force the Treasury Department to rely more heavily on the private sector to take up federal debt. And so far, money-market funds and other buyers have been happy to snap up the slew of Treasury bills Washington has been offering as a key part of its ramped-up funding requirement. The issuance was made all the bigger by the need to replenish cash after the debt-limit fight.
“The Fed’s debt runoff so far has been fairly painless,” said Blake Gwinn, head of US interest-rate strategy at RBC Capital Markets. “We just haven’t seen a big impact of QT in the marketplace,” he said, referring to quantitative tightening, the term for the Fed’s balance-sheet contraction.