<blockquote>
<p>Wouldn't it make sense if the coupon rate on treasury securities remained fixed while the Fed was offloading these assets to their primary customers, commercial banks?</p>
</blockquote>
<p>Coupons on pre-existing bonds are already fixed. Coupons on new bonds <em>could be</em> fixed to have same value as on old bonds, but then nobody would buy those bonds at par (or close to).</p>
<p>Bond is in essence an annuity that pays also face value once its expires, so present value of bond (fair price that person would be willing to pay) is given by:</p>
<p><span class="math-container">$$P = \frac{C}{i} \left( \frac{1}{(1+i)^t} \right) + \frac{F}{(1+i)^t}$$</span></p>
<p>Where <span class="math-container">$C$</span> is coupon rate, <span class="math-container">$i$</span> interest, <span class="math-container">$t$</span> periods that pay coupons up until expiry and <span class="math-container">$F$</span> face value.</p>
<p>Interest rate is set by Fed, so treasury can't really affect it. Face value and coupon can be freely chosen by treasury but treasury cannot choose <span class="math-container">$P$</span> for which people buy this bonds as nobody can be forced to do market transaction they do not consent to.</p>
<p>Hence, given that <span class="math-container">$F$</span> is usually by convention some round number like \$1000 only thing that can change on new bonds is the coupon. Even if F would change its not like that would bring any benefit since F would have to change in a way that offsets the low coupon rate or price would drop.</p>
<blockquote>
<p>If the treasury is offering higher rates b/c the Fed has raised rates, then I would assume it to be harder for the Fed to reduce their balance sheet. I hope this question makes sense.</p>
</blockquote>
<p>Not really, bonds do not sell at face value, if treasury offers higher coupon rate (bonds dont really have interest) then old bonds with lower coupon rate just sell for lower price. Fed cannot run out of money and they do not care about profit since they are also government institution even if they are independent from the executive branch. So they can still sell of those bonds and siphon some money from the economy that way.</p>
<blockquote>
<p>Obviously the US government is wanting to raise capital for spending expenditure by selling bonds, but doesn't it send a bad precedent for the government to be spending when inflation is high?</p>
</blockquote>
<p>Problem with government spending is that its not all discretionary. Government can't easily just decide to send less social security checks to retirees. Similarly, government can't easily cut welfare checks, medicare, medicaid etc. If you look at government budget, all the biggest parts are things that are politically extremely difficult to cut.</p>
<p><a href="https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/#federal-spending-overview" rel="nofollow noreferrer">US budget</a> consists of:</p>
<ol>
<li>social security (19%)</li>
<li>healthcare (15%)</li>
<li>income security (14%)</li>
<li>national defense (12%)</li>
<li>medicare (12%)</li>
<li>Education, Training, Employment, and Social Services (11%)</li>
<li>Net Interest (8%)</li>
<li>Veterans Benefits and Services (4%)</li>
<li>Transportation (2%)</li>
<li>General Government (2%)</li>
<li>Other 1%</li>
</ol>
<p>Cutting 7 is no go as that would mean US declared (partial) bankruptcy. Cutting 1, 2, 3, 5, 6 and 8 would be political suicide for most politicians, especially democrats though, and elections are coming up.  Number 4, national defense, could be in principle cut but that would mean that US would in essence force Ukraine to capitulate. In addition, serious cuts to defense would probably make US not able to guarantee Taiwan. 9 could be potentially cut, but you can't postpone all infrastructure projects indefinitely. US infrastructure is in bad state and ticking time bomb according to <a href="https://www.epi.org/blog/americas-infrastructure-bridges-jobs/" rel="nofollow noreferrer">Economic Policy Institute</a> report. 10 and 11 could be cut but that's just 3% of a budget and you can't cut it all or even half of it as government still needs to pay some employees (e.g. IRS etc). So simply there is no room to cut the budget as it would either force US government to default, be too unpopular before an election, allowed Putin to eat up Ukraine and because US infrastructure is already crumbling and this proverbial can was already kicked down the road as much as possible.</p>
<blockquote>
<p>Unrelatedly, QT reduces the money supply. Why does this curb inflation? Why isn't money like other goods? If the supply goes down the price goes up. Why is it not the same for money? Less money makes the price go up</p>
</blockquote>
<p>Money works as other goods (in this specific regard of course in other dimensions there are differences). Money market equilibrium can be described as (see Blanchard et al Macroeconomics):</p>
<p><span class="math-container">$$P  = \frac{M}{L(Y,i)}$$</span></p>
<p>where <span class="math-container">$P$</span> is price level, <span class="math-container">$M$</span> money supply and <span class="math-container">$L$</span> money demand that depends on interest rate <span class="math-container">$i$</span> and real output <span class="math-container">$Y$</span>.</p>
<p>Price level is not price of money, it is price of goods and services in terms of money as money is numeraire. Hence value of money is <span class="math-container">$1/P$</span>. If money supply increases value of money drops (like value and hence price of regular good like eggs drops when egg supply increases). Opposite also holds, you reduce money supply and value of money goes up and price level (prices of other goods in terms of money) go down, all else equal, precisely because money has more value.</p>

CC BY-SA 4.0
2023-03-18T18:21:39.990Z
what percentage of bonds are not sold?  if supply-demand was at equilibrium, unchanged yield might work
blue_ego
CC BY-SA 4.0
2023-03-18T18:47:02.983Z
But prices never go down, they just stop going up.  at least that's how I notice it to be.
blue_ego
CC BY-SA 4.0
2023-03-18T19:19:24.730Z
@blue_ego usually economies experience inflation, that is because economists believe small inflation 1-2% is good for the economy so central banks conduct monetary policy so there is always small inflation. However, they are not often successful and deflation spells actually occur. In US there was short deflationary period around 2009 and very short deflationary period 2015
1muflon1
CC BY-SA 4.0
2023-03-18T19:20:45.713Z
I don't know what % of US issued bonds are sold but I would guess all of them, you can try to search for it. Usually only risky developing countries have problem with selling their bonds.
1muflon1
CC BY-SA 4.0
2023-03-17T17:05:30.197Z
2023-03-17T17:19:56.173Z
2023-03-17T17:19:56.173Z
1muflon1
<p>I don't know much detail about how banking is working so you will have to bear with any misinformation or false conjecture I may have.</p>
<p>The US government wants to control inflation in 2023. The Federal Reserve, an independent organization, ie, not part the government, also wants to control inflation.  The Fed wants to control inflation by raising interest rates, but also executing asset reduction program somewhere in the vicinity of $8 trillion - US bonds and MBS (mortgage-backed security).  Wouldn't it make sense if the coupon rate on treasury securities remained fixed while the Fed was offloading these assets to their primary customers, commercial banks?  If the treasury is offering higher rates (b/c the Fed has raised rates?), then I would assume it to be harder (meaning the Fed assets are less attractive) for the Fed to reduce their balance sheet.  It doesn't seem they are working smartly together from an intuitive standpoint, but maybe I don't understand banking enough.</p>
<p>EDIT: Obviously the US government is wanting to raise capital for spending expenditure by selling bonds, but doesn't it send a bad precedent for the government to be spending when inflation is high?  They can be compared to the average business or person.</p>
<p>Unrelatedly, QT reduces the money supply.  Why does this curb inflation?  Why isn't money like other goods?  If the supply goes down the price goes up. Why is it not the same for money?  Less money makes the price go up.</p>

CC BY-SA 4.0
2023-03-17T17:24:10.353Z
@1muflon1's answer is incredibly complete, but just to restate one part of it very simply: Currency is just as bound up in Supply and Demand as any other commodity. Both these measures (reducing the balance sheet, and raising interest rates) reduce the supply, which (if demand remains the same) will increase the value, and impact inflation.
Satanicpuppy
<inflation><interest-rate><treasuries>
Effect of QT and higher bond yields simultaneously
blue_ego
# Effect of QT and higher bond yields simultaneously

(Asked by: username_0 on 2023-03-17)

I don't know much detail about how banking is working so you will have to bear with any misinformation or false conjecture I may have.

The US government wants to control inflation in 2023. The Federal Reserve, an independent organization, ie, not part the government, also wants to control inflation. The Fed wants to control inflation by raising interest rates, but also executing asset reduction program somewhere in the vicinity of $8 trillion - US bonds and MBS (mortgage-backed security). Wouldn't it make sense if the coupon rate on treasury securities remained fixed while the Fed was offloading these assets to their primary customers, commercial banks? If the treasury is offering higher rates (b/c the Fed has raised rates?), then I would assume it to be harder (meaning the Fed assets are less attractive) for the Fed to reduce their balance sheet. It doesn't seem they are working smartly together from an intuitive standpoint, but maybe I don't understand banking enough.

EDIT: Obviously the US government is wanting to raise capital for spending expenditure by selling bonds, but doesn't it send a bad precedent for the government to be spending when inflation is high? They can be compared to the average business or person.

Unrelatedly, QT reduces the money supply. Why does this curb inflation? Why isn't money like other goods? If the supply goes down the price goes up. Why is it not the same for money? Less money makes the price go up.

**Tags:** inflation, interest-rate, treasuries
> **Comments:**
> **username_1**: @1muflon1's answer is incredibly complete, but just to restate one part of it very simply: Currency is just as bound up in Supply and Demand as any other commodity. Both these measures (reducing the balance sheet, and raising interest rates) reduce the supply, which (if demand remains the same) will increase the value, and impact inflation.  

---

## 1 answers

### Answer by username_2 on 2023-03-17. Score: 2 | Accepted answer

> Wouldn't it make sense if the coupon rate on treasury securities remained fixed while the Fed was offloading these assets to their primary customers, commercial banks?

Coupons on pre-existing bonds are already fixed. Coupons on new bonds *could be* fixed to have same value as on old bonds, but then nobody would buy those bonds at par (or close to).

Bond is in essence an annuity that pays also face value once its expires, so present value of bond (fair price that person would be willing to pay) is given by:

$$P = \frac{C}{i} \left( \frac{1}{(1+i)^t} \right) + \frac{F}{(1+i)^t}$$

Where $C$ is coupon rate, $i$ interest, $t$ periods that pay coupons up until expiry and $F$ face value.

Interest rate is set by Fed, so treasury can't really affect it. Face value and coupon can be freely chosen by treasury but treasury cannot choose $P$ for which people buy this bonds as nobody can be forced to do market transaction they do not consent to.

Hence, given that $F$ is usually by convention some round number like \$1000 only thing that can change on new bonds is the coupon. Even if F would change its not like that would bring any benefit since F would have to change in a way that offsets the low coupon rate or price would drop.

> If the treasury is offering higher rates b/c the Fed has raised rates, then I would assume it to be harder for the Fed to reduce their balance sheet. I hope this question makes sense.

Not really, bonds do not sell at face value, if treasury offers higher coupon rate (bonds dont really have interest) then old bonds with lower coupon rate just sell for lower price. Fed cannot run out of money and they do not care about profit since they are also government institution even if they are independent from the executive branch. So they can still sell of those bonds and siphon some money from the economy that way.

> Obviously the US government is wanting to raise capital for spending expenditure by selling bonds, but doesn't it send a bad precedent for the government to be spending when inflation is high?

Problem with government spending is that its not all discretionary. Government can't easily just decide to send less social security checks to retirees. Similarly, government can't easily cut welfare checks, medicare, medicaid etc. If you look at government budget, all the biggest parts are things that are politically extremely difficult to cut.

[US budget](https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/#federal-spending-overview) consists of:

1. social security (19%)
2. healthcare (15%)
3. income security (14%)
4. national defense (12%)
5. medicare (12%)
6. Education, Training, Employment, and Social Services (11%)
7. Net Interest (8%)
8. Veterans Benefits and Services (4%)
9. Transportation (2%)
10. General Government (2%)
11. Other 1%

Cutting 7 is no go as that would mean US declared (partial) bankruptcy. Cutting 1, 2, 3, 5, 6 and 8 would be political suicide for most politicians, especially democrats though, and elections are coming up. Number 4, national defense, could be in principle cut but that would mean that US would in essence force Ukraine to capitulate. In addition, serious cuts to defense would probably make US not able to guarantee Taiwan. 9 could be potentially cut, but you can't postpone all infrastructure projects indefinitely. US infrastructure is in bad state and ticking time bomb according to [Economic Policy Institute](https://www.epi.org/blog/americas-infrastructure-bridges-jobs/) report. 10 and 11 could be cut but that's just 3% of a budget and you can't cut it all or even half of it as government still needs to pay some employees (e.g. IRS etc). So simply there is no room to cut the budget as it would either force US government to default, be too unpopular before an election, allowed Putin to eat up Ukraine and because US infrastructure is already crumbling and this proverbial can was already kicked down the road as much as possible.

> Unrelatedly, QT reduces the money supply. Why does this curb inflation? Why isn't money like other goods? If the supply goes down the price goes up. Why is it not the same for money? Less money makes the price go up

Money works as other goods (in this specific regard of course in other dimensions there are differences). Money market equilibrium can be described as (see Blanchard et al Macroeconomics):

$$P = \frac{M}{L(Y,i)}$$

where $P$ is price level, $M$ money supply and $L$ money demand that depends on interest rate $i$ and real output $Y$.

Price level is not price of money, it is price of goods and services in terms of money as money is numeraire. Hence value of money is $1/P$. If money supply increases value of money drops (like value and hence price of regular good like eggs drops when egg supply increases). Opposite also holds, you reduce money supply and value of money goes up and price level (prices of other goods in terms of money) go down, all else equal, precisely because money has more value.

> **Comments:**
> **username_0**: what percentage of bonds are not sold?  if supply-demand was at equilibrium, unchanged yield might work  
> **username_0**: But prices never go down, they just stop going up.  at least that's how I notice it to be.  
> **username_2**: @blue_ego usually economies experience inflation, that is because economists believe small inflation 1-2% is good for the economy so central banks conduct monetary policy so there is always small inflation. However, they are not often successful and deflation spells actually occur. In US there was short deflationary period around 2009 and very short deflationary period 2015  
> **username_2**: I don't know what % of US issued bonds are sold but I would guess all of them, you can try to search for it. Usually only risky developing countries have problem with selling their bonds.  

---

