The Federal Reserve s monetary policy and the expansion of U.S. bonds

**: CBN.

Author: Zhang Rui.

[ In terms of performing storage functions, up to 58% of the world's international reserves are US dollar assets, and the US dollar ranks first in the proportion of many indicators. ]

From the roots of history and theory.

The U.S. Treasury Department was founded in 1789 and the Federal Reserve was founded in 1913. In October 1907, the controlling shareholders of the Mercantile National Bank of the United States and the Nick Box Trust, the third largest trust bank in New York, failed to manipulate stock prices and went bankrupt, followed by a flood of depositors, and the two major financial institutions were withdrawn more than $1 million in less than an hour, and the cash was seriously shut. In a critical situation, the U.S. Treasury Department handed over $25 million to its trusted Morgan Bank, hoping to use Morgan's credit channels to provide aid to banks that suffered a run, but this effort did not work, and the people continued to flock to banks and trusts and other financial institutions. After experiencing the crisis and panic, the U.S. Treasury Department felt the hardships and difficulties of mobilizing market forces, and was also very worried that the power of the private economy would infiltrate and control the country's financial regulation and control, so it suggested that Wilson at that time set up a national bank, and soon the Federal Reserve was born.

It is important to emphasize that although the Fed was created as a result of public decision-making, it has remained a private institution since its inception. According to the Federal Reserve Act, the Federal Reserve is composed of the Federal Reserve in Washington and 12 Federal Reserve Banks, the latter of which subscribes to the Fed shares in the capacity of a private institution according to the proportion of assets to obtain Fed membership, and in addition to taking 6% of the Fed's net profit every year, the most important job is to participate in the Fed's regular monetary policy meetings and decide the outcome of monetary policy by vote. Such an organizational structure and decision-making method is obviously to get rid of the Fed's intervention in the Fed as much as possible and ensure its independence, but the Fed and the Fed are not completely insulated, in addition to the members of the Washington Federal Reserve or a public institution, the Federal Reserve chairman, vice chairman and seven executive members must also be directly nominated by the first and then submitted to Congress for approval before it can take effect, therefore, the Federal Reserve and the Treasury Department are the same functional departments of the United States. If the latter needs to work together to promote and achieve the macroeconomic control goal, the Fed also has an objective obligation to respond and cooperate.

According to the definition of economic theory, the objectives of bank monetary policy regulation and control are concentrated in four aspects: economic growth, price stability, full employment and balance of payments, and the Federal Reserve is no more than this. Although from the perspective of the main attribution of policy objectives, the Fed's monetary policy does not seem to be compatible with the Ministry of Finance, but it must be admitted that monetary policy and fiscal policy are the two core and most powerful tools of the country's macroeconomic regulation and control, and there is an amazing consistency in serving the two main goals of economic growth and full employment. Of course, in real economic activities, especially when the effective demand is insufficient and the supply is excessive, the contractionary fiscal policy will be adopted based on the needs of structural optimization, and a relatively loose monetary policy will be introduced at the same time.

The broadest financier and strongest endorsement of U.S. bonds.

The Federal Reserve's monetary policy includes two major parts: conventional and unconventional content, the former is divided into quantitative control tools (base money, reserves and open market business, etc.) and ** control tools (interest rates, exchange rates, discount and rediscount rates, etc.), the latter includes quantitative easing (QE), etc., as far as the issuance of treasury bonds in response to the Ministry of Finance is concerned, the Federal Reserve can be said to spare no effort whether it is to increase the frequency of the number of tools or to improve the technical operation level of tools. Not only as a purchaser for the sale of Treasury bonds, but also as a leading bank to endorse the Treasury bond issuance platform, it can even be said that without the Federal Reserve's "fiscal policy monetization" support, the US Treasury bonds are likely to be unsold, issued at a discount and even abandoned by the market.

In terms of quantitative instruments, the issuance of base money generally follows the principle of giving priority to economic growth and price conditions in traditional monetary theory, that is, the incremental rationing of money is determined according to the degree of economic coldness and inflation in reality, while the Federal Reserve implements Modern Monetary Theory (MMT), which determines the main body of base money creation is the combination of the central bank and the central bank, and the creation of base money is completed through the issuance of treasury bonds and the purchase by the central bank. The basis for the Federal Reserve to create incremental money is the number of Treasury bonds of the Ministry of Finance, and the Ministry of Finance will return the currency to the Federal Reserve after the maturity of the Treasury bonds. The data shows that 15 years ago, the balance of M2 (broad money**) in the United States was 7 trillion US dollars, and now it has swelled to 21 trillion US dollars, an increase of 300%, and at the same time, compared with the balance of 10 trillion US dollars 15 years ago, the US Treasury bonds increased by as much as 340%, almost the same increase shows that during this period, a large part of the liquidity issued by the Federal Reserve to the market has been converted into Treasury bonds on the main asset side of multiple entities.

* In terms of tools, the monetary interest rate determines the yield of treasury bonds, and the Federal Reserve relaxes monetary policy during the economic downturn, among which the federal benchmark rate will be reduced to 0 during the new crown epidemic stage, which directly lowers the yield of treasury bonds and greatly reduces the interest cost of treasury bonds, so that the Ministry of Finance, as the main issuer, can confidently and boldly step on the "accelerator" of large treasury bond issuance. amplify the profit expectation and confidence of purchasers, thereby improving the success rate of treasury bond issuance; In the economic upswing stage, the Federal Reserve tightened its monetary policy, and the benchmark interest rate rose to drive up the yield of treasury bonds. In the latest round of monetary policy tightening cycle, the Federal Reserve raised interest rates 11 times, and the yield on 10-year Treasury bonds once rose above 5%, but it was during this period that the US Treasury bonds were successfully increased from 30 trillion to 34 trillion US dollars, indicating that the gravitational effect of the high yield of Treasury bonds driven by high monetary interest rates is indeed not small.

In terms of quantitative easing, the Fed personally went out to buy Treasury bonds, and after three rounds of QE and one round of reversal operations during the financial crisis and the new crown epidemic, the Fed's holdings of Treasury bonds increased to 5$8 trillion, affected, its balance sheet expanded to a maximum of $9 trillion. The Federal Reserve has eaten Treasury bonds in an official capacity, which has constituted a very significant herd effect in the market, and a large amount of money has poured into the bond market, pushing up the Treasury bonds, and the Fed has also made a lot of money from it, including the highest annual profit of $106 billion during the financial crisis, and the largest annual floating profit of more than $400 billion during the new crown epidemic stage. It has directly strengthened the Ministry of Finance's confidence in expanding public investment and resolving deficits. Today, the Federal Reserve is still "shrinking its balance sheet", because the Treasury bonds in the "balance sheet" stage are basically bought in the secondary market, so last year there was a record annual loss of $114.3 billion, and the Fed exchanged a single loss for the Treasury's goal of win-win.

Of course, the Treasury will also repay the Fed for its escort behavior. On the one hand, the Ministry of Finance put its current account in the Federal Reserve, and the balance of the account changes with the scale of Treasury bond issuance, that is, the more Treasury bonds are issued, the larger the scale of the account, and the funds in the account are called reserves in the hands of the Federal Reserve, and the Federal Reserve can be free to dispose of without affecting the normal expenditure of the Ministry of Finance, and the Ministry of Finance has actually built a way for the Fed to make money; On the other hand, the issuance of treasury bonds by the Ministry of Finance is actually to relieve pressure on the Federal Reserve, after all, it is easier to create the risk of inflation in China under the premise of excessive base money creation and overflowing liquidity, and when more incremental money is converted into treasury bond assets, inflation can naturally become light, and the Fed will not attract public scolding.

The double support of dollar hegemony and monetary credit.

According to the official website of the U.S. Department of the Treasury, in the past 50 years, the federal ** budget has only run a surplus five times, which means that more than ninety percent of the years have been beyond expenditure. Since fiscal and tax revenues are simply unable to meet the needs of fiscal expenditures, especially the interest expenses on debts that are getting larger and larger, they can only rely on the debt cycle model of issuing new debts to repay old debts, and the Ministry of Finance has actually embarked on a road of no return to expanding the scale of debt. The Federal Reserve is about to start a new round of interest rate cut cycle ahead of schedule, and according to the calculations of authoritative institutions, the early shift of monetary policy can save more than $76 billion in interest expenses on Treasury bonds every year. Whether it is the Treasury Department's determination to issue Treasury bonds or the Federal Reserve's support for Treasury bond issuance, the real confidence of both is the hegemony of the US dollar and the monetary credit derived from it.

Since the collapse of the Bretton Woods system, although the US dollar has been decoupled from the US dollar, and the exchange rates of national currencies are no longer closely related to the US dollar, the US dollar has found a more important carrier of oil, and continues to have a significant impact on the world economy by serving as the value scale of the most important resource in the upstream of the global industrial chain, and even if the euro and the RMB later joined the Special Drawing Rights (SDR) basket of the International Monetary Organization, the weight of the US dollar in the SDR is still stable at more than 40%. The exchange rate of non-US currencies still depends on the eyes of the US dollar; In terms of payment and circulation, according to the statistics of the international fund clearing system, the market share of the US dollar in international payment is 46%, the proportion of cross-border financing is 84%, the proportion of global foreign exchange transactions is 88%, and 47% of the international claims in financial transactions are denominated in US dollars.

The unique position of the US dollar has also put a special label on US dollar assets, and US Treasury bonds have become the world's most important "safe-haven assets", among which 10-year US Treasury bonds have also become the value vane of global financial assets, making the market rush to US dollar assets, especially US Treasury bonds. The privileged position of "one currency dominance" also means that the US dollar is no longer a single sovereign currency, but has been entrusted with the responsibility of the global "credit standard". For global central banks, the more US dollar treasury bonds purchased, the stronger the foreign exchange reserve base, the higher the international credit degree of the country, and even the credit of US bonds can also constitute support for the credit of the local currency, enhance the influence of the local currency in the foreign exchange market, and then facilitate a country to issue bonds in the international financial market for financing. It can be seen that the Fed's over-issuance of dollars and the Treasury's over-issuance of treasury bonds are actually the objective results of the continuous evolution of the dollar's privileged position.

The hegemony of the US dollar continues to this day, in addition to complex historical and practical reasons, the most important thing is that the US dollar has a relatively strong and stable credit support. At present, in addition to the Federal Reserve as the largest holder of U.S. bonds, which constitutes a relatively strong endorsement force for U.S. bond credit, followed by the central bank's heavy position in U.S. bonds, which has also produced collective support for U.S. bond credit, although the proportion of U.S. bond holdings of foreign central banks has declined in the past decade, but the credit of U.S. bonds has not been substantially damaged, and a very noteworthy phenomenon is that as long as the non-U.S. major shareholders of U.S. bonds sell U.S. bonds in a big way, there will be a strong non-U.S. buyer power at the same time. U.S. bonds have actually become the best tool for the interest game between major countries, and not only the Fed's "visible hands" are protecting U.S. bonds, but also many "invisible hands".

The author is a director and professor of economics at the China Marketing Society