I was reading about how to tack a large sailing ship. It was quite interesting. The important thing to do is first trim the sails. Ease the fore sails, tighten the aft sails, once that is done, and only then put the rudder over.
If you think about the size of the bond market, (which dwarf the stock market) which, best I can tell, world wide about 133 trillion dollars. The fed balance sheet is about 9 trillion dollars. This looks to me like the Fed has a rudder, not a sail.
What I an saying is that the FED has some control, but it does not have absolute control.
This is true. The vast majority of bonds, especially at long durations, are bought by investors. These include citizens, bond funds, institutional investors (such as insurance companies) and sovereign nations (e.g. Japan and China).
Fed Chair Alan Greenspan called it a “conundrum” when Treasury yields fell even though the Fed was raising the fed funds rate. It was China buying Treasuries with their trade surplus to keep the value of the yuan from rising.
I’ve been thinking about this (federal debt ownership) for a while. And I can only come up with some questions:
How do you define “vast majority”? Out of the ~$24T external debt (not intragovernmental) , the Fed holds about $6T, so that’s 25% of it, leaving only 75% remaining.
How much long debt do citizens really hold directly? I speak to friends and acquaintances (IRL and online) and I can’t think of any that hold much long-term bonds. I know some that hold TIPS (and they usually limit them to 10 years) and many who hold I-bonds, but that’s because they are inflation adjusted, and sometimes the numbers are good for those. But I can’t recall a single person who owns 30-year, or even 20-year treasuries directly. Of course, they do own long-term bond funds that hold a lot of it.
I think most of the long-term debt is held by institutions that match it with long-term obligations. Like insurance companies, pension funds, target date retirement mutual funds, etc.
And the rest is probably held by other countries and their reserve banks, sometimes to be used for currency stabilization, and sometimes simply as regular reserve holdings.
And yet that small rudder does manage to turn a very large ship. It’s not immediate, but it is a small, steady pressure applied over time that gets the job done.
This has been written about before:
A bit in the mouth of a horse controls the whole horse. A small rudder on a huge ship in the hands of a skilled captain sets a course in the face of the strongest winds. A word out of your mouth may seem of no account, but it can accomplish nearly anything—or destroy it!
I would not be too quick to dismiss the importance of the Fed.