So as not to ruin what passes for jokes around here, yesterday evening I might have said that the Fed did nothing, which is true as far as interest rates go but that is not actually all that crowd does, and not all it did yesterday. The bigger news coming out of the FOMC crew was its announcement that it’s slowing down its buying of US debt, which doesn’t sound sexy when I put it that way, but it is extremely hot.
“To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October,” the FOMC said in a statement.
Way back in March, the Fed had agreed to buy $300b in Treasurys, mostly 10-year notes, and it’s bought about $250b of them so far. Originally, the program was scheduled to last six months, but it was extended a month into October to give the program some more time to slowly ramp down, thinking that just going cold-turkey would work about as well as when your boss quits smoking cold-turkey and resorts to actually hitting you about the head and neck when your weekly status report is three minutes late. Yields rejoiced, a little.
But just the fact that the Fed didn’t say it was going to keep on buying stuff is itself a sign that it’s calling a bottom. While it doesn’t plan on touching its key interest rate for at least another year, the bank’s actions yesterday do seem to indicate it thinks the worst is behind us. Ben has been all, “Yeah, everything we did stopped FINANCIAL ARMAGEDDON,” and patting himself on the back, with an implied request that Ron Paul go get stuffed.
After all this is said and done, the Fed will have over $5t (trillion!) in US debt on its books, close to half of the total amount of the public debt. For all the talk of how China has us by the short and curlies in that regard, it’s really not quite that bad. Here’s a chart showing who owns what percentage of the national debt, as of December 2008 – the last quarter for which I could get numbers across the board. China holds about 25% of the “Foreign Entities” slice which, okay, that’s still a lot (around $800b as of last month), but not so much that we all need to be brushing up on our Mandarin just yet.
Anyway, the point of the Fed ending its Treasury buyup program is that it feels there is now sufficient capital in the market that investors private and public, domestic and, yes, foreign, are now able to handle the purchasing of our growing debt on their own. So that’s a pretty major vote of confidence in the economy.