The Fed Is Shedding Treasuries at an Annualized Rate of $601 Billion
In the 20 weeks ended April 23, the Federal Reserve's outright holdings of U.S. Treasury securities had fallen by $231 billion, which is an annualized decline of $600.7 billion (see Chart 1). Up until recently, the Fed has rarely been a net seller of U.S. Treasury securities (see Chart 2). Of course, the reason the Fed has become such a large net seller of U.S. Treasury securities is that it is now providing about 14% of total reserve credit via the discount window, the Term Auction Facility (TAF) and the Primary Dealer Credit Facility (PDCF) (see Chart 3). If the Fed does not want the fed funds rate to trade below its target rate, it has to drain reserves to offset the reserve injections via the discount window, TAF and PDCF.
The non-partisan Congressional Budget Office is projecting that the fiscal year 2008 federal budget deficit will increase to $396 billion from $162 billion in fiscal year 2007. So, federal borrowing in this fiscal year is projected to be 2.4 times as much as last year. And on top of this increased federal borrowing, we now have the Federal Reserve providing $601 billion less support to the Treasury securities market at an annual rate. Is it any wonder why the yields on Treasury securities are rising now? You might want to put your IRS tax-rebate manna into some sort of saving account for your children so that they can pay the higher taxes needed to service the public debt that is being incurred to bailout imprudent borrowers and lenders in the recent housing bubble.
Chart 1
Chart 2
Chart 3
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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