Did the Fed Print Money In QE1/QE2?

Did the Fed Print Money in QE1 and QE2?– Correction and Addendum June 6, 2011, Bob Eisenbeis, Chief Monetary Economist

In Friday’s economic commentary “Did the Fed Print Money in QE1 and QE2?” an astute reader pointed out an error in which the following sentence should have read, “Indeed, for about two years now we have been tracking weekly the estimated duration of the Federal Reserve’s capital and the amount of flexibility the Fed would have to raise rates before the market value of its assets was less than the value of its liabilities.”  We apologize to our readers for any inconvenience this may have caused and would like to thank our reader who brought it to our attention.

Now to our addendum…

An interesting question also arose in connection with the above concern about the interest sensitivity of the Fed’s Open Market Portfolio.  Why does the Fed carry assets in the System Open Market Account at face value and not market value, or a reasonable estimate thereof? After all, portions of the Fed’s asset holdings are currently marked to market and are carried on the books at fair value, such as the assets held in the Maiden Lane portfolios that were acquired as part of the rescue of AIG and the Term Auction Loan Facility.  Given that the primary assets in the SOMA account are easily valued agency MBS and Treasury securities, providing market values or reasonable fair-value estimates would be quite easy.  The answer is partly historical and partly a policy issue. 

Until the current crisis, the Fed’s permanent asset holdings were tightly tied to its outstanding currency liabilities.  For example, at the beginning of August 2007, prior to the onset of the financial crisis, the Fed had total system liabilities of $840 billion, of which $777 billion or 93% were Federal Reserve notes.  Section 16 of the Federal Reserve Act requires that those notes be collateralized.  A number of different types of acceptable collateral are specified in the Act, but for all practical purposes, the assets used for collateral are US Treasury securities.  Before the crisis, the Federal Reserve held about $791 billion of its assets in Treasury securities, of which 81% matured in five years or less.  Since the volume of outstanding currency is very stable and tends to increase at a steady pace relative to GDP growth, the Fed’s policy was to buy Treasuries on a by-and-hold basis.  Maturing issues were simply rolled over, and given the short-term nature of its holdings, there was no need to be concerned about changes in the value of the portfolio since securities were seldom, if ever, sold. 

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