Thursday, January 14, 2010

Federal Reserve Securities

In a comment on the previous post, Jon explained that the Fed has held only 50% of its security portfolio in the form of T-bills for years. He pointed out that the Fed used repos and reverse-repos to manipulate the federal funds rate.

I found data on the Fed's permanent security portfolio from 2002 until today. It is clear that the Fed greatly reduced its holdings of T-bills starting in 2008. This chart is only the Fed's security portfolio, and doesn't include Fed lending. The figures are in millions. So, the Fed sold off its $200 billion holdings of T-bills in the first six months of 2008. The Fed held hardly any T-bills during the crisis month of September of 2008.

As for the repurchase agreements and reverse repurchase agreements, I was a bit surprised. While I was aware that the Fed used "repos" to manipulate bank reserves, this always seemed to me to be just a temporary open market purchase of T-bills. The Fed buys the T-bills and transfers funds to the sellers' banks. And that same seller has committed to buy them back the next day. It was interesting to discover that instead the "collateral" is unspecified and the Fed is effectively making overnight loans to primary security dealers secured by a variety of government securities. The reverse repos, on the other hand, do involve the Fed selling securities, usually T-bills, and promising to buy them back the next day.

Anyway, my interest in the Fed's balance sheet involves the liquidity trap. If the Fed is purchasing securities that already have a zero nominal yield, then it seems plausible to me that this will have little effect on nominal expenditure. The nominal yields on very short T-bills are very low.

But the Fed has vastly expanded its portfolio of securities who have yields that are significantly greater than zero. There is no liquidity trap.

1 comment:

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