While Fed board governors are not known for plain speaking, it does appear that they were aware of and concerned by these developments during the boom. Greenspan famously described falling
In the light of these concerns, it is remarkable that, during the period in which the Fed was raising
Despite the fuss about currency intervention and reserves accumulation by Japan and China, their central bank holdings of US treasuries appear to be smaller than the Fed’s. Neither country publishes full details of its reserves holdings, but according to the most recent US Treasury survey of foreign holdings of US securities, as at
An obvious question is, therefore, why does the Fed hold such a large proportion of treasuries, and why did they continue to increase their holdings even when they were concerned that other buyers were fuelling the boom by driving down
In a fiat money system, the central bank supplies, distributes and collateralises its money (mainly banknotes) by buying debt. In order to maintain confidence that the central bank remains solvent and able to redeem banknotes if the demand for money falls, this debt tends to be highly creditworthy and liquid. Clearly, government bonds have these properties, so the Fed buys treasuries, and as bonds mature and the underlying demand for central bank money expands with inflation and real economic growth, the Fed is a regular buyer. These treasuries are held in the SOMA.
But government bonds are not the only suitable monetary asset; the Fed accommodates
So the Fed could have countered the fall in
The most likely explanation why the Fed did not do this is simply that they are not looking to change what works. The annual reports on open market operations describe how the Fed avoids distorting the market for specific treasury issues, but do not discuss the possibility of responding to changes in the behaviour of other investors and its impact on the yield curve, let alone whether treasuries are the most suitable debt instrument to provide the mainstay of the SOMA. A less favourable explanation might be that the Fed board governors were unwilling to take action that might have been seen as targeting the housing market specifically.