The US government continues to run massive budget deficits. That means it has to sell bonds to finance the debt. The Federal Reserve is buying a lot of them as it continues to monetize the ever-growing federal debt. Between March 2020 and March 2021, the central bank monetized more than half of the massive pandemic debt.
The central bank makes all of this government and spending possible by creating artificial demand in the bond market. The Federal Reserve buys Treasuries on the open market with money created out of thin air. Without this central bank intervention, there wouldn’t be enough demand in foreign and domestic markets to absorb all of the bonds the US Treasury needs to sell. Since March 2020, the federal government has added $4.7 trillion to the national debt.
And as WolfStreet put it, the Federal Reserve went «hog-wild» with debt monetization. Since it launched QE Infinity in March 2020, the Fed has purchased a staggering $2.44 trillion in US government bonds. In other words, the Fed has monetized more than half of the US debt accrued since the beginning of the pandemic. The Federal Reserve now holds a record 17.6% of the total US national debt.
The Fed’s share of US debt load exploded from 9.3% in Q1 2020 to its current level. The Federal Reserve is the biggest player in the US bond market. That means the government will have to borrow even more money and the Fed will have to monetize more debt. If the central bank does take its thumb off the bond market, interest rates will spike.
Last summer, Federal Reserve Chair Jerome Powell insists the Fed isn’t monetizing the debt. During testimony before the Senate Committee on Banking, Housing, and Urban Affairs back in June, Powell flatly denied the central bank is buying assets in order to facilitate the Treasury’s sale of debt. It’s unfathomable how Powell could claim with a straight face that the Fed isn’t monetizing the debt even as it effectively monetized more than half of the debt in the past year. At some point, the central bankers will be faced with a choice — continue monetizing the debt and inflating the money supply or deal with surging inflation by letting rates rise.