The Federal Reserve's Holdings of US Treasury Bonds Declines?

When the Federal Reserve wants to manipulate the federal funds rate, it buys and sells US treasuries in open market operations. When it wants to lower the rate and increase the money supply, it buys treasuries. In September 2007, it had $780 billion in these treasuries on its balance sheet. Last July, it had only $478 billion.[1] Such a decline is unprecedented. Since the US economy nearly always grows, the money supply must increase proportionately in order for deflation not to happen. And yet here we see one influence on the money supply cut by nearly 40%. Yet the monetary base has spiked.[2] This is because the Fed sold its treasury bonds to the public in order to make way for more loans. As long as it doesn't sell the bonds to US banks, it won't hurt the US money supply.

The details are in the Fed's current balance sheet. The new loans are listed in the Term Auction facility and the "other assets". I don't feel terribly comfortable analyzing it. On their September 2007 balance sheet other assets is only 40 billion. These other assets may not be quite clear, although I haven't investigated thoroughly. Bloomberg has sued[3] to gain access to the collateral on the loans and that might include more information on these other asset.

The Big Picture, my favorite financial blog, has a nice graphic on this.