Fed’s biggest-ever bond-buying binge is drawing to a close

The largest Federal Reserve bond-buying program is about to come to an end.

With the U.S. central bank having bought close to $6 trillion of Treasuries and mortgage bonds in the past two years after the onset of the Covid pandemic rattled markets, this Wednesday’s $4.025 billion operation looks set to be its last in Treasuries, with mortgage operations running through the end of the week.

The current program, which included more than 580 separate operations to buy Treasuries and 1,200 to purchase mortgage-backed securities, has dwarfed all three of the Fed’s previous quantitative-easing programs combined, helping to grow the central bank’s balance sheet to an unprecedented $8.4 trillion.

Of course, the Fed won’t be a stranger to the bond market. It will remain keenly involved through its day-to-day management of policy and also intends to purchase some securities through auction add-ons as those it currently holds mature and roll off. But this week marks the end — for now at least — of the program it’s been conducting in the secondary market to expand the balance sheet through bond-buying.

Here’s how the program that’s winding up compares in size to the earlier ones aimed at growing the Fed’s total holdings, in billions of dollars. All these programs were done at times when the Fed’s policy rate was effectively 0%, in order to keep additional downward pressure on yields.

In addition to these, the Fed conducted a fifth program in 2011-2012, commonly known as Operation Twist, which essentially replaced $667 billion of short-dated debt with longer-term securities, but didn’t change the overall level of debt holdings.

The total quantity of purchases under the program exceeds growth in the Fed’s System Open Market Account over the same period. That’s because a portion of its purchases of mortgage bonds was in fact reinvestment of funds returned by the issuer as borrowers repaid principal on the loans underpinning those securities. By contrast, reinvestment of maturing Treasuries was handled separately, via auctions, rather than through secondary-market buying.

Fed policy makers have said they’re likely to begin to shrink the balance sheet, beginning as soon as this year, by not replacing a fixed dollar amount of its maturing Treasury holdings each month. This was done from 2017 to 2019, using runoff caps that increased over time.