A group of Senate Republicans are raising red flags over the rapid expansion of the Federal Reserve balance sheet, which they are concerned about could affect interest rates, the strength of the US dollar and the general economy of the United States before their colleagues leave. Realize that it is a serious problem.
The concerns raised by Senators Rick Scott (R-Fla.), David Perdue (R-Ga.), James Lankford
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As deficit concerns spread across the Senate GOP conference, it puts more pressure on the Senate Majority Leader Mitch McConnell
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What is at stake in the upcoming talks is high for McConnell, who is in re-election against a well-funded Democratic opponent. He wants to fulfill his status and avoid a backlash from the conservative right, including Paul and Cruz, who are ravaging the projected cost of the next package.
Now, more senior members of the Republican conference are sounding the alarm on the Federal Reserve balance sheet, which has soared from $ 4.27 trillion on March 11 to $ 6.93 trillion on July 22. During that span, US Federal Reserve Treasury stock ownership has skyrocketed from $ 2.52 trillion to $ 4.27 trillion.
Some Republicans fear that with the escalation of US debt, they are seeing a drop in demand in global financial markets for US bonds, which could herald rising interest rates and a major problem for the economy in the future.
“I am concerned with the size of the balance sheet, I am concerned with how much the Fed has had to buy our treasures this year, I am concerned that the price of gold is rising,” said Scott, who warned fellow Republicans during private discussions of the project. of stimulus law.
When asked about the possibilities of decreasing the demand for US debt, Scott says that “it has already happened.”
He estimates that the Fed has had to buy almost 60 percent of what it called “net cash.”
“That should tell you that there is no demand,” he said.
Monthly statements from the Treasury Department show that public debt increased by $ 3.1 trillion from the beginning of March to the beginning of July. During that time, the absolute ownership of the United States Treasury securities by the Federal Reserve rose $ 1.74 trillion.
Using these metrics, the Fed has purchased about 56 percent of the Treasury debt issued in March, April, May, and June.
“Sen. Scott is correct that during this four-month period, more than half of the increase in public debt was purchased by the Fed,” said David Wilcox, principal investigator at the Peterson Institute for International Economics.
He noted that most of the Fed purchases occurred during the height of the financial panic in March and April.
“This was a period of extraordinary dysfunction over a six-week period from mid-March to the end of April, and during that period, yes, absolutely, it was the design of the Federal Reserve to buy Treasury debt at a historically unprecedented rate.” . he said.
Wilcox noted that Fed Treasury bond purchases moderated in May and June at a rate of “about $ 25 billion per week” and interest rates have remained low.
But some Republican senators worry that interest rates may rise and surprise Washington, which would require Congress to appropriate tens of billions of dollars more each year to pay off debt.
An unexpected rise in interest rates despite Fed intervention could also create another obstacle for the economy.
Perdue, the former CEO of Reebok and Dollar General, said he has raised his concerns with the Treasury Secretary. Steven Mnuchin
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“We have gone from $ 23 [trillion] at $ 26 trillion in debt, “he said.” I’m really concerned about the potential impact here of another $ 1 trillion or whatever we end up with. “
“We need to be very cautious. Everything we have to do now must be very specific, “he said.
Perdue fears the Fed’s balance sheet may grow to more than $ 13 trillion and said he has raised the issue with Federal Reserve Chairman Jerome Powell.
“I am very concerned about that. We have gone from $ 4 [trillion] and they will go to $ 13 and a half trillion and with the debt that we are adding here it could reach $ 15 [trillion] or $ 16 billion, ”he said.
Perdue said he was concerned about low demand for US debt in a recent auction.
“I’ve been through the traps in [this]”He said.” I am concerned that we take out $ 1.6 trillion offered in new debt and only $ 400 [billion] was subscribed. “
Like Scott, Perdue believes the Fed had to step in and buy Treasuries to make up for declining demand for US debt in the financial markets.
“The Fed stepped in and what it did was keep interest rates low, artificially,” he said. “Because if you went to the market, to supply and to demand, you would have to raise interest rates for people to buy it.”
Maya MacGuineas, chair of the bipartisan Committee for a Responsible Federal Budget, said Congress and the Federal Reserve are in unknown waters.
“The risk of being in unprecedented territory, since we are both on loans and the Fed is that we don’t know what will happen and there are many risks and the upward pressure on interest rates is definitely one of them,” he said.
But he said the possibility of a severe recession caused by a pandemic is also a significant risk.
Bank of America Merrill Lynch chief investment strategist Michael Hartnett warned on Friday that rising debt and increased fiscal policy will cause a “major downgrade” of the dollar.
Hartnett wrote that the erosion of the dollar is “underway as the default narrative for the US economy with excess debt, insufficient growth and maximum monetary and fiscal stimulus.”
Lankford said he is also concerned about the growing role of the Federal Reserve in eliminating US debt.
“That’s a great balance sheet,” he said, warning that the long-term threat is that demand from the US debt market may begin to run low.
“If we don’t have a strong offer and our interest rates go up, that’s the biggest concern,” he said. “The problem is that everyone discards it until it happens and that is the biggest challenge we have. At some point you have a debt crisis, and everyone says ‘Oh my gosh why didn’t we do anything?’ ”
Lankford noted that the bigger the next coronavirus package grows, the more debt the Treasury Department will have to issue and the more the Fed will have to buy.
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