The End of Fed Asset Purchases (For Now)
This week the Federal Reserve scheduled their last batch of Treasury purchases in the process that began during the pandemic. The Fed has spent over $4 trillion buying securities since the pandemic started. Let’s look back at what happened two years ago that triggered this extraordinary response.
In March 2020, as the pandemic struck the US and the government started shutting down parts of the economy, the market for trading US Treasuries came under significant stress. Typically, the Treasury market is one of the busiest markets globally, and holders of Treasuries can treat their Treasury holdings almost as a form of cash.
Let’s back up for a second and talk about cash, or rather, where do you keep your cash safe? If you store it in a bank account in the US, then most likely, that account is protected by the Federal Deposit Insurance Corporation. The FDIC insures bank accounts up to $250,000, which means your account (up to the limit) is backed by the US Government. So if your bank were to fail (very rare, but see Lehman Brothers), your account balance would be safe.
Now, what if you should be so fortunate to have more than $250,000 in cash? Or, perhaps more realistically, where do institutions with large amounts of cash keep it safe?
There are many options available, but a major one is, as you might have guessed, US Treasuries. Since the government issues them, they are essentially a risk-free, interest-bearing form of currency. They are widely held by many organizations and even foreign governments and play a central role in the US dollar-based global economy.
So, back to 2020. By March of that year, domestic and foreign holders had sold $750 billion of Treasuries. Usually, when stock markets are going down, there is strong demand for Treasuries as investors seek safety in a storm. But this time, people were looking to raise cash, and a broad base of investors was selling.
By mid-March, few buyers remained, and the dealers were becoming overwhelmed and unable to make up the difference. Effectively the market was starting to seize up. In other words. the ATM for Treasuries was running out of cash.
At this point, the Federal Reserve stepped in and started buying Treasures. A lot. In March, the Fed purchased $918 billion of both Treasures and Mortgage-backed Securities, and by the end of June 2020, the total was $2.2 trillion. This included about $1.2 trillion of Treasuries and $600 billion of Agency Mortgage-backed Securities, another “safe” asset backed by the government.
For reference, the Fed increased its balance sheet by about $60 billion a month in January and February 2020.
In June, the Fed announced they would continue to stabilize the markets by buying $80 billion of Treasuries and $40 billion of MBS per month. This buying continued unchanged until November 2021, when they announced they would begin tapering the monthly purchases. A couple of months later, the Fed increased the rate of tapering and announced the program would end by March 2022.
Before taking action at the beginning of March 2020, the Fed owned $2.3 trillion of Treasuries and $1.3 trillion of MBS. As of now, with one more month to go, the Fed has added $3.1 of Treasures and $1.3 of MBS, nearly $4.5 trillion total.