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As soon as next year, analysts say the Fed will resume large-scale buying of debt securities — this time just U.S. Treasuries — in amounts that may ultimately exceed its crisis-era purchases. According to an estimate by Wells Fargo & Co., the central bank’s balance sheet will rise past its historic peak as it adds over $2 trillion to its Treasury debt holdings in the next decade.
Of course, it won’t be called QE, which President Donald Trump has urged the Fed to restart. Rather than trying to drive down long-term interest rates to boost growth, the purchases are intended to replace the Fed’s mortgage-bond holdings gradually as they mature and to keep ample reserves in the banking system. But the effect, some say, will nevertheless be largely the same.
The composition of The Fed’s balance sheet is changing from agency mortgage-backed securities to Treasuries.
The US and The Federal Reserve are not alone in using their Central Bank to purchase the staggering debt load created by Congress (remember, government spending originates in the US House of Representatives. Japan and the The Bank of Japan (BOJ) are already.on a buying spree.
The BOJ has become the world’s second central bank after the Swiss National Bank and the first among Group of Seven countries to own a pool of assets bigger than the economy it is trying to stimulate.
If The Fed takes on the unwanted supply of Federal debt, we are unlikely to see 10Y Treasury yields exceeding 3.5% and Freddie Mac”s 30Y commitment rate exceeding 5%.
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