On Sept. 30, four Harvard scholars presented a new paper about the U.S. Treasury and the Federal Reserve at an event hosted by the Brookings Institution. The authors contend that the Treasury severely undermined the Fed, which has tried to stimulate the economy by buying long-term securities. While the Fed was working to reduce the remaining maturity of Treasuries in the private sector, the Treasury was extending the length of its debt. The authors want the Fed and Treasury to stop hindering each other and to start cooperating. They also recommend that the Treasury sell more short-term debt to help economic growth and to promote economic stability.
The paper has the potential to influence Fed and Treasury policy. In particular, the Treasury might be urged to sell less long-term debt in favor of more short-term debt. Because this could reduce the supply of quality long-term assets available to match long-term liabilities, pension fund managers should watch for any changes in Treasury policy.
It is absolutely true that the Treasury's debt has extended by various measures, and it might be true that this extension tended to buoy interest rates, contrary to the Fed's efforts. However, the authors did not seem to delve into the causes of the debt's lengthening. Apparently, they assumed that the portfolio lengthened because the Treasury pumped up its sales of long debt. For example, during the Brookings event, one of the authors stated that “the stock of long-term debt that people had to absorb rose massively.”
This is not what happened. The Treasury persisted in selling mostly short debt and relatively little long debt. The Treasury certainly did not sell so much long debt that it swamped the Fed's efforts to reduce private holdings of long debt, as the authors suggested.
The author's apparent misperception of the Treasury debt is surprising. It may have colored their recommendation to shorten the Treasury's issuance. If they had recognized how short the issuance already is, they might not be so comfortable in urging the Treasury to shorten it further.