In last Friday’s entry to his Economics One blog, Stanford Professor John Taylor reiterated an observation he made a week earlier in a June 1 Wall Street Journal op-ed: In fiscal year 2011, the Federal Reserve, largely as a result if its second large scale asset purchase program (or “QE2”), purchased a quantity of Treasury debt equivalent to 77 percent of all the debt issued to the public by the federal government. In his blog post Taylor refers to this as an “amazing percentage” and in the Wall Street Journal piece lumps it in with a collection of other policies that he views as problematic:
“… the discretionary stimulus packages and exploding debt, the regulatory unpredictability associated with ObamaCare and Dodd-Frank, which includes hundreds of rules still waiting to be written, and the unprecedented quantitative easing through which the Federal Reserve bought 77% of new federal debt in 2011.”
The 2011 figures cited by Taylor do reflect, in dollar terms, a large increase in the Fed’s Treasury purchases. As he notes, the 77 percent represents an increase of $853 billion in Fed holdings over a $1,109 billion expansion in publicly held government debt. Prior to last year, the largest dollar increase in Federal Reserve holdings of Treasury securities over a single year was $278 billion, in fiscal year 2009 (equivalent to 16 percent of the record increase in publicly held debt of $1,741 billion). The next three largest increases were $70 billion (32 percent), $52 billion (14 percent), and $44 billion (12 percent) in fiscal years 2002–04 (in that order).
So, in historical terms and absolute dollar terms, the 2011 share of the debt flow was quite large. But does it represent a significant change in economic terms? In their review of the evidence regarding the effects of earlier central bank asset purchase programs in the United States and elsewhere, Sharon Kozicki and her Bank of Canada colleagues make this observation (emphasis added):
“The effectiveness of unconventional monetary policy measures depends on several factors. Measures appear to have been effective (i) when targeted to address a specific market failure, focusing on market segments that were important to the overall economy; (ii) when they were large in terms of total stock purchased relative to the size of the target market; and (iii) when enhanced by clear communication regarding the objectives of the facility.”
Professor Taylor’s calculation focuses on the flow of debt issuance and who purchased it, and we wouldn’t completely discount the proposition that flows of purchases can be important. But the accumulated evidence suggests to us that we should be really thinking in terms of something like the stock or accumulated total of Fed purchases relative to the size of publicly held Treasury debt, as the passage from Kozicki and coauthors indicates. That calculation produces a Federal Reserve share of about 16 percent of publicly held Treasury securities for fiscal year 2011, which is up sharply from the 8–10 percent levels seen during the 2008–10 period but very similar to the share of Treasury securities held by the Federal Reserve during the years 2000 through 2007.
We obviously would not conclude from this that monetary policy was less accommodative in the past several years than it was prior to the crisis. In 2009 and 2010 asset purchases were dominated by the accumulation of agency-issued mortgage-backed securities. We would want to measure the stance of monetary policy with reference to the Fed’s share of a broader set of assets, an idea that was introduced in a previous macroblog post.
But whether one prefers to think in terms of stock-share or flow-share, thinking in terms of ratios does highlight an important part of the policy environment of the moment. Harvard professor and former Treasury Secretary Lawrence Summers has, for example, suggested that the federal government issue more longer-term debt in order to support government spending at a low cost. Because both QE2 and the more recent maturity extension program were targeted at reducing the holdings of longer-dated Treasury securities that would otherwise be held by private investors, the effectiveness of the Fed’s actions is sensitive to the type of debt management actions advocated by Summers (as this paper nicely explains).
More generally, if the Fed’s share of publicly held debt is a key element in determining the degree of monetary policy accommodation, changes in the level and composition of outstanding government (or agency) debt may amplify or mitigate the effects of central bank asset purchases. In normal times we wouldn’t think too much about this impact because explicit changes in the funds rate would swamp any effects of asset share, which in any event would only evolve gradually. But with the funds rate at the zero bound, asset share and composition take on more importance.
In the shorter term, changes in the magnitude of federal government may not have too large of an independent impact on the stance of monetary policy, although it is noteworthy that current projections indicate the Treasury will sell about $1,450 billion of debt to the public in fiscal year 2012, and $1,060 billion in 2013. In addition there is this, from today’s edition of The Wall Street Journal‘s Real Time Economics:
“The U.S. Treasury intends to continue to gradually extend the average maturity of the securities it issues—a tactic that locks in borrowing costs but potentially dilutes the impact of a Federal Reserve policy intended to boost the economy.”
In such an environment, it is probably good to remember that standing pat with central bank asset purchases does not necessarily mean standing still with monetary policy.