The U.S. Treasury Department won’t change its debt management policy if the Federal Reserve decides to shift its government securities portfolio into shorter-term debt, a Treasury official said today.
“As long as the Fed is rolling over its securities, we’re indifferent,” said Matthew Rutherford, the deputy assistant secretary for federal finance, in a press briefing today in Washington.
Fed policy makers are rethinking the way the central bank reinvests proceeds from its holdings of maturing Treasury debt, according to minutes from a monetary policy meeting in June. Officials discussed whether to halt reinvestments entirely, or whether to invest only in securities with maturities of three years or less.
The Fed currently reinvests across the range of U.S. government debt securities. The reinvestment decisions would not affect the Fed’s broader monetary policy stance.
Rutherford said the Treasury hasn’t received any further insight into what the Fed might be planning. He also said debt managers wouldn’t change their offering strategy if the Fed follows through on such a proposal.
“If they were to pursue a strategy of reinvesting in securities with maturities of three years and in, it wouldn’t impact our debt management strategy, would not change the amount or composition held publicly or the amount and composition that we’re offering in any given month,” Rutherford said.
“We think about our rollover risk to the Fed differently than we do to the marketplace,” he said.
In 2009, the Fed bought $300 billion in Treasury securities as part of broader efforts to stabilize the financial system and the U.S. economy. The central bank also purchased more than $1 trillion in mortgage-backed securities and agency debt.
Louis Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said the Fed may decide to change its portfolio so that its Treasury securities are easy to sell quickly, should the central bank want to drain reserves in a hurry. He said the average maturity of the Fed’s holdings soared from 40 months to 82 months during the financial crisis, with few of these securities due to run off soon.
“ Historically, the Fed has preferred to maintain a relatively short average maturity in its Treasury portfolio for liquidity purposes,” Crandall said. “A shift in reinvestment patterns might take years to have a significant impact on the composition of the balance sheet, but it would pay immediate dividends from a communications perspective. The change could be presented as another post-crisis normalization step.”