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treasury has now started the last few quarters to issue the ratio of short-term bills to longer term debt in a way that is different from their standard guidelines in the past that essentially say that not more than between 50 to 20% of the total stock of debt should be shortterm and they're issuing more shortterm bills less longer term or longer duration bonds and effectively if you think about it this is a form of backdoor quantitative easing because you're reducing the supply of longterm treasuries while increasing the supply or shorter ones and by reducing the supply given the demand they're pushing the price of 10year Treasury now the long-term treasury higher and the yield lower so it's a fact of the backdoor form of quantitive easing the way that the Fed was doing when they were actively purchasing long-term bonds as a way of reducing the yield now we know that the FED is trying to tighten monetary policy until recently in order to cool off the economy slow down growth and push inflation towards this 2% Target now this activist treasury isurance becomes effectively way for Treasury to undo what the FED has done and our empirical estimate suggest that the amount of this active unconventional uh fiscal policy is equivalent to the FED having cut policy rates the FED funds rates by about 100 bus points and we believe that the fact that growth has remain above potential and inflation has remained sticky rather than moving faster towards 2% is due to the fact that treasury has effectively interfered with what the FED has done and has tried to undo the impact of the FED tightening because they want to maintain Financial conditions easier than otherwise to stimulate growth during this part of the business cycle to explain how this work is as follows think about what happens when the FED does quantitive easing there is a demand and there is a supply for treasuries when there is more demand the price goes higher and the yield Falls there is an inverse relation within the price of the bond and the yield and when the supply increases of course more Supply and therefore you need a lower price and a higher yield so when the FED do quantitive easing is trying to ease Financial conditions but reducing long rates and by reducing the long rates on Treasury the mortgage rates and and other Market rates that are related the 10year treasur reduced as well because there a spread relative to treasuries so you're demanding more bonds you're increasing the price you're reducing the yield that's what you do that's quantity vising suppose that you are instead the treasury you have to issue debt to finance your deficit you can issue short-term debt or you can issue longer term debt if you decide to issue longer term debt less of it you reduce the supply of long duration treasuries compared to the demand and when the supply is reduced given demand the price is going to be higher and the yield is going to be lower so QE done by the FED is acting on the demand for treasury by the FED while QE done through the back door by the treasury is working by reducing the supply doesn't matter whether you increase the demand or you reduce the supply the price is higher the yield is lower so that's the way you should think about what the treasur is doing right now is a backdoor form of quantitative easing so the FED is trying to push the FED funds rate now to five and a half so it's effectively as if the effective fif hands rate today is not five and a half but four and a half in our view that's one of the reason why the economy has been till recently in the no Landing scenario where growth is about potential and inflation has remained more sticky than was originally forecast and predicted by the FED estimating the impact of ATI on 10year treasuries we took studies and there's a broad range of literature estimating what are the impact of quantitive vising and in the lit quantity vising was shown that about 800 billion to a trillion of QE is equivalent to 25 basis points reduction in 10year treasury or equivalently 100 basis points reduction in the policy rate the FED funds rate so uh we don't have other episodes of uh this ATI is unusual unless you go to you know uh other very far historical examples so the way we thought about it was QE as this impact and at effectively by reducing the supply of long duration as opposed to increasing the demand has an impact the well describ by affecting interest rate risk on Long Bor yields 25 basis points and 100 basis points on the short end of the Y curve so they are effectively equivalent there are really small nuances that are very technical but uh substantially is the same story now in terms of where the economy would be a year ago of course people when the Fed was hiking were worried that we'll have a hard Landing then people said well we got lucky that a bunch of positive aggregate supply shock maybe we'll have a softish landing and until six months ago I would say it looked like inflation was dropping like a stone last year and growth was above potential we're on the way to a soft Landing that is exactly what the FED wants and what treasure he wants however in the last uh in the first three months of the year what happened was that inflation ticked up and growth was still robust maybe less robust than last year but robust so people started to worry about a a kind of a no Landing Zone that growth was too strong last year that inflation was falling but core inflation was remaining above 3% as opposed to Falling Towards two and the question was hey the FED height rates all the way from zero to five and a half people were worrying about the hard Landing or a short and shallow recession we would not even get that we were in a l Landing zone so what can that explain it and um maybe some of it was lack and positive Supply shock but in our paper we argue the part of that story is instead activist treasury inssurance that essentially is financial condition maintain Financial condition both on the short end and the long end of the yield curve easier than otherwise it s at also the price of other assets including for example corporate bonds or real estate related assets and therefore part of the reason why the Fed was unable to achieve the soft landing and we're in a no Landing Zone was these activist treasur isurance now you're asking me what if they had not done that then I would say that the economy probably would have slowed down much more inflation would have moved FAS Wass 2% and we don't know whether that would have caused an actual short and shallow recession a softish landing or a real just soft Landing but certainly probably treasury was worried that what the Fed was doing might have been an Overkill they knew that this year will be an election year they knew that the results of the election depend in part on whether you can avoid the recession or not and to be on the safe side that power takeaway they wanted to undo part of the tiing of the fact and that's where the activist treasu isans policy came into effect so I cannot say that would have been a recession but certainly economic growth would have slowed down more according to what the Fed was Desiring to do that certainly would have been and we could have been at the risk of maybe a short and shallow recession possibly possibly we don't know of course
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