The Federal Reserve’s holdings of publicly traded U.S. Treasury securities – federal government debt – pushed above $2 trillion for the first time last week, hitting approximately $2,001,093,000,000.00 as of Aug. 14, according to the Fed’s latest weekly accounting.
The Fed’s accounting for the previous week showed that it had owned approximately $1,993,375,000,000.00 in U.S. Treasury securities as of Aug. 7.
Back on Dec. 31, 2008, before the Fed began its strategy of “Quantitative Easing,” the Fed owned only $475.9 billion in U.S. Treasury securities. Since then, the Fed’s holdings of U.S. government debt have more than quadrupled.
Launched in 2009, the Fed’s Quantitative Easing (QE) efforts have attempted to stimulate the economy.
“Under QE,” explains a February 2013 Congressional Research Service report, “the Fed attempts to lower long-term Treasury and MBS [mortgage-backed security] yields directly through purchases that drive down their yields, in the hope that lower Treasury and MBS yields will indirectly filter through to reductions in other private long-term yields. (Lower Treasury yields do not directly stimulate economic activity – they are only stimulative if other yields fall as a result.) This could occur because Treasury securities are considered a ‘benchmark’ against which other private securities are priced, so that other securities are automatically repriced when Treasuries are repriced (although the change is unlikely to be one-to-one).”
(In its latest weekly accounting, the Fed also said that as of Aug. 14, it owned approximately $1.299831 trillion in mortgage-backed securities that had been issued by Fannie Mae, Freddie Mac and Ginnie Mae. Back on Jan. 14, 2009, the Fed owned only $5.6 billion in mortgage-backed securities.)
By law, the Fed is not permitted to buy U.S. Treasury securities directly from the Treasury. Instead it buys them in the secondary market. However, when the Fed buys U.S. government debt even on the secondary market it creates a closed circle: The Treasury pays the Fed the interest owed on that part of the federal government’s debt, and almost all of that interest – considered “profit” by the Fed – is paid back to the Treasury.
“Monetizing the deficit refers to financing the budget deficit through money creation rather than by selling bonds to private investors,” said the CRS. “Hyperinflation in foreign countries has consistently resulted from governments’ decision to monetize large deficits.
“According to this definition, the deficit has not been monetized,” said CRS. “Section 14 of the Federal Reserve Act legally forbids the Fed from buying newly issued securities directly from the Treasury, and all Treasury securities purchased by the Fed to date have been purchased on the secondary market from private investors.”
“Nonetheless,” said CRS, “the effect of the Fed’s purchase of Treasury securities on the federal budget is similar to monetization whether the Fed buys the securities on the secondary market or directly from the Treasury. When the Fed holds Treasury securities, Treasury must pay interest to the Fed, just as it would pay interest to a private investor. These interest payments, after expenses, become profits of the Fed. The Fed, in turn, remits about 95 percent of its profits to the Treasury, where they are added to general revenues. In essence, the Fed has made an interest-free loan to the Treasury, because almost all of the interest paid by Treasury to the Fed is subsequently sent back to Treasury.
“The Fed could increase its profits and remittances to Treasury,” said CRS, “by printing more money to purchase more Treasury bonds (or any other asset).”
As of Aug. 15, according to the Bureau of the Public Debt, the total value of Treasury securities held by the public was $11,952,073,953,024.85. (The rest of the federal government’s debt is “intragovernmental” debt – n.b. money that the Treasury owes to federal trust funds, such as the Social Security trust fund.)
The $2,001,093,000,000.00 in Treasury securities now owned by the Fed equals 16.7 percent of the U.S. government’s debt held by the public. Another $5.6006 trillion in U.S. Treasury securities is owned by foreign entities, according to the Treasury’s latest report on foreign holders of U.S. debt. The combined $7,601,693,000,000.00 in U.S. Treasury securities owned the Fed and foreign entities equals about 64 percent of all extant U.S. Treasury securities.
After the Fed, entities on Mainland China are the largest owners of U.S. government debt, holding $1.2758 trillion as of the end of June.