Friday, September 19, 2014

The Fed and savings on Treasury debt

An interesting number is the amount of money that has been saved because the Fed has been printing money through buying a lot of debt.  The Federal debt has moved from $4.8 trillion in at the end of fiscal year 2006 and is now at $11.9 trillion at the end of fiscal year 2013. However, the interest expense has actually declined by $10 billion over that time as the average interest rate has fallen from 4.9 to 1.9 percent. This has been good fortune, but there is more.

The 2014 budget deficit was $506 billion estimated. The Fed sent to the Treasury $53 billion during the year, but there is more help from the Fed. The reduced interest expense because of Fed was $356 billion, so the budget deficit without the help of the Fed would have been $915 billion. The Treasury pays interest on debt held by the Fed who then remits some of the money back to the Treasury.

This is what the Fed policy is all about, not just what is happening in labor markets. You add the fact that banks have to hold liquid assets and you have increased demand for Treasuries. The deficit has become a non-problem as long as the Fed holds big Treasury numbers on its balance sheet. However,  now that buying of new debt is over, except for reinvestment, we will see a new phase of the "21st Century Treasury-Fed Accord". 

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