The Fed could do that by not reinvesting the instruments it has purchased through QE, as they mature,  with instruments of the same maturity. 

Can you explain this statement in balance sheet ?

Engin: the maturing security is a liability of the issuing entity (Nonbank Entity). Thus, when it matures, the liabilities of the Nonbank Entity fall (minus Liabilities). 

The Federal Reserve was holding that Security as an Asset, now that falls.

The Nonbank Entity pays off the Security by writing a check on its account at the Bank...so deposits at Bank fall as do Reserves.

See attached. Sorry, I could not get the vertical lines to show.

Dear @david

I understand that this scenario is valid for MBS assets 

Can you explain this scenario for "  Treasury Securities" ? 

Yes. It is very similar--almost identical. Look at the attachment, the first set of transactions are in the orange block, the second set of transactions are in the blue box.

First, the Treasury switches money from its account at a private bank (to has many of these accounts around the country) and deposits the funds in its account at the Fed. For the bank, this reduces deposits and reduces their holdings of reserves. For the Fed, this reduces reserves and increases Treasury Deposit at Fed.

Then the Treasury pays off the bond that the Fed is holding: so, securities (liability for Treasury, asset for Fed) fall and Treasury deposit at Fed falls. This is the blue box.

The end result: reserves fall in the system AND securities held by the Fed fall.

More simply, one could also imagine the Treasury paying the Fed cash (Federal Reserve Notes) for the security...securities would fall and outstanding cash (a liability of the Fed) would fall. Same impact in the system (monetary base is reduced). However, technically, the Treasury and Fed would most likely interact as I've shown in the attachment.

Dear @David_Hammes

The Treasury will only be able to redeem the US Treasuries at the Fed by reducing its account at the Fed by 347,760 (millions of dolars) since that is all it has in its account.

In the asset side; U.S. Treasury securities : 2,463,462 (millions of dolars)

You said that "Treasury switches money from its account at a private bank"

Where can I see this amount ? Is this enough for  2,463,462 (millions of dolars) ?

Thanks for kindly accounting/balance sheet responses.

Sincerely

Engin

For information on the US Treasury's holdings se the Treasury Bulletin, a monthly publication of the US Treasury, on-line at:

https://www.fiscal.treasury.gov/fsreports/rpt/treasBulletin/current.htm

I append a couple of pages from the Sept. 2016 issue. There you can see how much they have in their Fed Reserve and Tax and Loan Accounts as of June 2016.

Total receipts for the US Fed. Govt are estimated to be $3.35 Trillion (page 13, Treasury Bulletin, Sept. 2016, table FFO-1). But, of course, not all pf this would be used to retire debt.

The Treasury will re-pay its debt obligations (interest and principle) as they come due, that is just a fraction (see pg. 16) of its total debt.

The amount of Treasury debt that the Fed chooses to hold is a choice of the Fed. They can always choose to reduce their holdings of US Treasury bonds, before they mature, by selling them in the open market. Of course, they can acquire more in the open market, too.

Dear @David L Hammes

https://www.newyorkfed.org/markets/soma/sysopen_accholdings.html

This is SOMA datas which indicate mature dates,

30.04.2018 is a date which is equal to 347,760 (millions of dolars) [ Acumulated value of matured Bonds]

and then after the 30.04.2018,  U.S. Treasury, General Account will turn negative...

You said that Treasury will use tax revenues(receipts) for compensate this negative account and turn to positive.

My question is;

If Treasury use tax revenues(receipts) for compensate this negative account , budget balance will turn to negative.

 Then Treasury will need NEW borrowing for compensate budget balance..

for rest of 2018 - 288.328 (millions of dolars) [ cumulated amount of matured Bonds]

for 2019 - 338.118 (millions of dolars) [ cumulated amount of matured Bonds]

USA have a normally budget balance deficit and Treasury finance FED balance sheet , Is FED scenario is sustainable (without sell these bonds before the mature date) ?

Note :Total Public Debt as Percent of Gross Domestic Product

https://fred.stlouisfed.org/series/GFDEGDQ188S

Thank for your all kindly and technical explanations.

"My question is;

USA have a normally budget balance deficit and Treasury finance FED balance sheet , Is FED scenario is sustainable (without sell these bonds before the mature date) ?"

Engin, everything you note is true and you have a good source and grasp of the numbers."

Whether or not their (US government's) fiscal planning is sustainable depends on what one means by "sustainable" and on whether or not the demand for US Govt debt instruments (securities: bills and bonds) increases, remains constant, or falls (and, to get more detailed in which maturities and in what amounts). Of course, it also depends on their spending and taxation plans going forward.

It also depends on who buys their debt, if it is private, non-Federal Reserve holders, then the Treasury has to pay interest on the debt to these holders and that adds to the expenditures side of the government balance and must either be covered through taxation, borrowing, and or reductions in expenditures on other categories of spending.

Here is one place where "sustainability" comes in: if the US public do not want their taxes increased and if they do not want expenditures decreased, they must face the fact that borrowing must increase. As you note, if the US Govt is running a budget deficit, then new borrowing makes this deficit larger.

How large can a government's budget deficit get relative to the nation's GDP, (and relative to the future taxing power) before bond-holders get nervous enough to start to sell their bonds at increasing discounts and interest rates start rising? I would argue that no one really knows. So far, judging by bond yields, the US government and its debt securities seem to be favored in the bond markets. But, of course, that can change quite quickly. At the moment, the situation seems 'sustainable', but that does not mean it has to continue. Of course, everyone watches US bond markets closely to see whether or not the situation looks as if it's changing. Everyone has their own interpretation.

If, however, the Federal Reserve buys the debt, then the interest payments that the Fed receives, over and above their costs of operation, get sent back to the US Treasury. In effect, the US Treasury borrows at almost 0 cost from the Federal Reserve.

So, why doesn't the Fed just buy all US govt debt? The issue for the Federal Reserve is that if it buys the US govt debt (thus gaining an asset) it has to create a liability (an increase in the Treasury's account at the Fed). The Treasury is typically borrowing in order to cover expenditures so this newly created liability (of the Fed) increases the high-powered monetary base.

Will the increasing monetary base lead to price inflation? One of the more surprising features of money demand in the past 7-8 years has been the increase in demand for money and thus the fall in velocity of money. The monetary base has increased dramatically and more inflation (which, under a 'stable velocity' hypothesis) would have been expected--but we have not seen it. In fact, if anything, inflation seems to be "too low" (at least measured against the Fed's target of +2%).

But, banks do not have to hold excess reserves indefinitely and in ever larger quantities (though they may be induced to do so if the Fed increases the interest on excess reserves, IOER--but this is costly for the Fed and also makes it look as if they are 'just giving' profits to banks) and the general public do not have to hold on to money to the same degree that they are now. So, if either or both of these choices change (by banks, and/or by the public) the monetary base might support a much faster growing and enlarging money supply which might lead to "too-much" inflation.

High rates of inflation would not be sustainable. Of course, no one knows when and if banks and the public will revert to pre-2008 behaviors (on excess reserves and money holding). Maybe this new behavior is the new 'normal'. But, I would argue, no one really knows.[This assumes that the Fed does not change its balance sheet further].

So, the Fed tries to figure it out by watching the actual inflation rate (with a lag),  and an idea of whether or not people expect more (or less) inflation in the future by watching (among other things) the spread between real interest rates (proxied by the yield on TIIPS bonds) and nominal interest rates on bonds of the same maturity.

At the moment, neither of the indicators seems to be showing that rising rates of inflation are occurring or are expected.

But, of course, expectations can change quickly and for reasons that we only intuit after-the-fact. There is a great deal of after-the-fact analyses explaining why what happened "had to" happen and why. There is very much less analyses (predicting better than a coin-flip) of what will happen, when, and why. That is the nature of trying to predict the future.

So, whether what is happening (and might be expected to happen going forward) is "sustainable", I do not know. But, I have my doubts, but then I am one of those who is surprised that the rapid increase in the monetary base in the US did not cause more inflation (unless I broaden a measure of prices to include stock prices).

Lastly, while this conversation--which I enjoy immensely--has been carried out using the US as an example, any country or region with a similar financial structure (private banks and financial institutions, central bank, borrowing government) face the same challenges. So, the US is operating not in a vacuum but relative to other governments and their behaviors and experiences. Thus, if 'world' markets view the US as a safe repository for their savings relative to other regions and countries, the US fiscal policy, as imbalanced as it currently is, may be sustainable. If 'world' perceptions change, of course 'sustainability' is put at risk. So, we might look at the spread between US govt bond yields and bond yields on other countries' bonds; look at movements in currencies, etc.

I hope I haven't just taken many, many words to tell you what you already know.

Dear Professor Hammes, I understand that there is uncertainty in FED, Because no one exactly knows what will happen in the next. In addition to this, there is great fear about SUDDENLY interest rates hike and inflation rise.

Thank for all your kindly responses.

Sincerely

Engin