U.S. Fed Wants To Shrink The Balance Sheet – What Are The Implications?

There is a lot of hand-wringing surrounding the possible move by the U.S. Federal Reserve as it considers how and when to begin to unwind the $4.5 trillion in debt on the balance sheet.  The discussion centers around the speed of the unwinding and the potential consequences to the bond market under each scenario.

Well, we have good news for you.  Since the U.S. Government owns both the asset and liability, they could effectively “retire” the debt without any consequence to the private sector.  Will they do this?  We doubt it since we haven’t heard this discussed as a possible solution.

In order to effect this transaction, all that would have to happen would be for the Treasury to take a credit and the Fed a debit, and these securities would be gone with no impact on the private sector.  Nice and clean!  We’ll just have to wait and see what they decide to do, but let’s hope that their actions don’t create unnecessary volatility within the bond market.



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