Hundreds of other financial writers/analysts, myself included, have worried for months about what will happen when the Fed finally decides to stop its massive bond buying program (QE) and starts unloading its unprecedented $3+ trillion balance sheet. The implications could be very negative for interest rates and the economy.
Not to mention that the Fed could incur huge losses if it has to unload these bonds and mortgages in a higher interest rate environment.
The current thinking is that the Fed will halt its monthly purchases of $85 billion worth of Treasury bonds and mortgages sometime late this year or next year, as I discussed last week. Then at some point, presumably when the economy is stronger, the Fed would begin to sell off these same securities, which would be at least $4 trillion or more by that point.
However, a couple of my Blog readers raised a question that I frankly had not thought about. That thought was: What if the Fed decides to hold all these securities to maturity and never has to sell them? Honestly, I feel a little embarrassed that I had not thought of that possibility. The thought of the Fed holding 30-year mortgages and 30-year Treasury bonds to maturity did not cross my mind.
KUDOS to my subscribers who I have always maintained are more sophisticated than the average e-mail/newsletter reader! (Editor’s Note: I always read your responses; please keep them coming. Positive or negative, you make me think.)
Well, guess what. In his congressional testimony on February 27, Fed Chairman Ben Bernanke asserted that the Federal Reserve doesn’t ever have to sell assets, period. The Fed may decide to hold the bonds and mortgages on its balance sheet to maturity, he told lawmakers.
Of course, while there are legitimate questions about whether or not the Fed will still be around in 30 years (for better or worse), there are some potentially negative issues with the Fed holding $3+ trillion (soon to be $4+ trillion) in bonds and mortgages to maturity. For one, many believe that if the Fed does not reduce its balance sheet, it will lead to higher inflation.
Bernanke admitted in his testimony last month that no country has ever had a comparable increase in the size of its central bank’s portfolio and unwound it “in the precisely analogous way.” That’s Fed-speak for, don’t assume we will liquidate this unprecedented debt portfolio in the same way we accumulated it.
He also assured lawmakers that the Fed isn’t planning an immediate exit and continues to add to its stimulus, buying $85 billion of mortgage-backed securities and Treasuries each month. So the duration and size of the QE is open-ended. Thus, we have no idea when it will end.
The point is, Bernanke has raised the possibility that the Fed may never sell its unprecedented securities holdings, and just hold them to maturity (up to 30 years). This raises a lot of new unanswered questions. I’ll have more to say on this subject after I research it further.
Have a great weekend everyone!
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