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During the 2007-2012 financial crisis, the Federal Reserve bought U.S. Treasury bonds and mortgage-backed securities to uplift the economy. With the economy growing steadily and the Federal Reserve riding an all-time high reserve, one might think the opposite would be the case.
But such a move is not meant to lower interest rates; it is a replacement for mortgage-backed securities. While expected to add more than $2 trillion in Treasury debt holdings, it’s expected that the mortgage-backed investments will be close to being liquified.
This move is expected to have the same effect as “quantitative” easing, which will most likely happen as the year wears on and a 2020 election beckons. If the Federal Reserve Board has its way, the Federal Reserve holdings will retain a quantitative easing position while strengthening the economy simultaneously.
The higher demand of Treasury bond holdings will, in effect, help in liquefying the reserves needed by the federal government and secure the maintenance of low-interest rates to support the White House and Congress’s necessary spending for 2020.
During the post-crisis era, early in the year, yields on 10-year treasuries have averaged just under 2.5 percent — about half the level in the decade before the recession. But due to the Fed’s multi-trillion debt holdings, monetary policy is much more stimulative today than it would have been pre-crisis.
Before the start of the first round of quantitative easing in 2008, the Fed had less than $900 billion in debt securities. By 2017, it had amassed $2.5 trillion of treasuries, the most ever, plus $1.8 trillion in mortgage-backed securities. The Fed finally began unwinding quantitative easing in October 2017 by not replacing all the bonds that had matured. This was an effort to normalize policy, which has led its holdings through the end of September.
Most Wall Street dealers expect the Fed to start again accumulating treasuries by mid-2020. By the end of the next decade, the Fed will have more than doubled its holdings of the debt, to about $4.4 trillion, leaving the overall size of its balance sheet close to $5 trillion. The Central Bank’s stock of mortgage-backed securities will then have shrunk from more than $1.4 trillion to less than $400 billion over that span.
This projection is based on a slowly expanding U.S. economy. But the Fed will be ready to make changes if an unexpected reversal occurs.
Arctic Melt Could Open Transportation Opportunities
As ice in the Arctic region continues to melt as a result of climate change, the United States is hoping to capitalize on the new trade opportunities and transportation.
The Arctic could offer these, along with combating potential geopolitical threats.
According to U.S. Secretary of State Mike Pompeo, this would allow ships to reduce the time it takes to get between continents. Pompeo adds that “steady reductions of sea ice” are opening new naval passages, potentially slashing the time it takes for ships to travel between Asia and the West by 20 days.
But Finnish Foreign Minister Timo Soini said disagreements about climate change were the reason that no joint resolution between involved countries could be elicited at this time.
Senator Dan Sullivan (R-Ala.), who participated in a speech on this subject by Pompeo, hailed this joint approach, although still unofficial, that such potential eventuality would be a boon to Alaska, “the only American state which would be involved.”
Historically, Northwest Passage waterways have been virtually impassable because of the thick ice to be traversed. Therefore, such evolving sea routes would be open in the reasonably near future when this evolution occurs.
In representing U.S. concerns, Pompeo also warned of the possibility of aggression from Russia and China as the Arctic region becomes more accessible to traverse between continents. He adds that such negative influences could open up “expansion attempts,” especially by China. Pompeo went on record to point to recent attempts by a bellicose China, which is seriously interested in becoming ever more powerful as a dominant nation.
In addition to such disturbing possibilities, the Arctic houses 13 percent of the world’s undiscovered oil, 30 percent of still undiscovered natural gas and an abundance of uranium, rare earth minerals, gold, diamonds — millions of square miles of untapped resources, according to Pompeo.
Sullivan echoed Pompeo’s sentiments, warning the Trump administration that Alaska was primarily concerned with Russia, which comes within only a few miles of Alaska’s Aleutian Islands.
He expressed satisfaction that the Trump administration is well aware of both the opportunities and the dangers that “opening” the melting Arctic ice portends.