Several weeks ago, BUSINESS WEEK pointed out that the Treasury was likely to reduce its issuance of longer-term debt in favor of shorter maturities. If successful, this strategy would tend to put downward pressure on long-term interest rates and thus both reduce the federal deficit and stimulate capital investment by business and home purchases by the public. Since then, Laura D. Tyson, incoming head of the Council of Economic Advisers, has confirmed that such a move was under consideration, and the markets have responded by pushing long rates lower.
What's been less noted, however, is that the Federal Reserve has been pursuing a similar strategy by buying more longer-dated securities as it seeks to meet the economy's demand for liquidity and facilitate monetary growth. Economist Robert DiClemente of Salomon Brothers Inc. points out that securities bearing coupons beyond five years accounted for 25%, or $7.7 billion, of the Fed's net purchases last year. That compares with only $1.2 billion in 1991, after actual liquidation of its longer-term holdings in 1988 through 1990.
Looking at the year ahead, DiClemente predicts that the Fed "will continue to provide secondary support in the longer end of the market."