The Perils of the Fed’s Vast Bond Holdings

The Federal Reserve is engaged in a colossal transformation of the financial economy. Yet scarcely anyone is noticing.

What it’s doing is like walking a herd of elephants through Midtown Manhattan without attracting much attention. That used to happen in New York in the wee hours — when the circus came to town and elephants walked over the city’s bridges and through its tunnels to Madison Square Garden.

I’m not talking about the Fed’s decisions on short-term interest rates, which get the headlines when the central bank meets, as it did on Wednesday. The Fed kept those rates steady — and fairly high — at about 5.33 percent, in a frustrating battle to subdue inflation.

I’m talking about a remarkably ambitious and poorly understood Fed project known as quantitative tightening — Q.T. for short. That refers to the Fed’s reduction of the Treasury bonds and mortgage-backed securities on its mammoth balance sheet.

The central bank said on Wednesday that it would start slowing the pace of this asset paring in June, to $60 billion a month from a maximum reduction of $95 billion a month. It’s not selling securities, just quietly eliminating some as they mature, without reinvesting the proceeds.

These may look like big numbers. Yet on a comparative basis, they are piddling.

Consider that the central bank’s assets peaked two years ago at almost $9 trillion. That sum is roughly one-third of all the goods and services — the gross domestic product — produced in the United States in one year. Now, after much careful effort, the Fed has cut that total to about $7.4 trillion.