QT Pipe Dream

Sweet dreams are made of this
Who am I do disagree?
I've travelled the world and the seven seas
Everybody's looking for something
--Eurythmics

This article highlights problems for the federal government should the Fed engage in quantitative tightening (QT) in earnest. QT involves reducing the ~$9 trillion in assets on the Fed's balance sheet. These assets, primarily Treasury and agency securities, were accumulated during various quantitative easing (QE) campaigns waged since 2009. 

The Fed can shrink its balance sheet in two ways. It can simply sell the bonds on the market. Or it can let maturing bonds roll off the books without replacing them.

Either approach is problematic for the federal government. Every bond that the Fed sheds will need a buyer. Because the Fed was by far the biggest buyer of newly issued federal government paper over the past few years, thus artificially elevating the price, it seems unlikely that there will be buyers willing to purchase these bonds unless the price is much lower.

Consequently, Treasury prices are likely to fall, which is bad news for a federal government seeking to finance $trillions in spending this year.

Falling bond prices raise interest rates, which creates another problem for the federal government: higher debt servicing costs. Higher interest expense means more federal dollars must be spent to service the debt. It wouldn't take much to break the already burgeoning federal budget.

By monetizing debt via QE, the Fed financed the federal government's profligacy. Should the Fed engage in QT, the federal government would be forced into austerity.

Given the chickenhawks at the Fed, this seems a pipe dream.