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# Fed 5: How did the Fed gain weight?

2026-07-18·x-repost-20260718-164503
Fed 5: How did the Fed gain weight? ## How did the Fed gain weight? Beginning in 2008, in response to the financial crisis and economic recession, the Federal Reserve launched multiple rounds of QE. What is quantitative easing? That is to directly purchase long-term assets on the market; which two long-term assets are the largest?

MBS (mortgage-backed assets) from the real estate market and long-term Treasury bonds of the U.S. government. In the first round of QE (before 2010), the Fed bought 300 billion long-term U.S. bonds and 1.25 trillion MBS, directly injecting reserves, liquidity and cash into commercial banks, financial institutions and markets.

After the first round of QE, it was still difficult to support the first wave of financial crisis and recession. The Federal Reserve launched the second round of QE. In the second round of QE (2011), it directly bought 600 billion in long-term US bonds. This car can't stop. In 2012, the Federal Reserve also launched a round of Operation Twist QT.

What is "twist"? This distortion is really a distortion. The Federal Reserve should be short-term and avoid long-term, but in this round of QT, the Fed continued to maintain total assets unchanged. Sell short-term Treasury bonds and buy long-term Treasury bonds.

If it doesn’t work after the second round, there will be a third round of QE (2012-2014) The Federal Reserve began regular monthly purchases of long-term Treasury bonds and MBS. In this round, it purchased a total of US$800 billion in US Treasuries and US$720 billion in MBS. Then there was QE during the epidemic.

The Federal Reserve bought about US$2.2 trillion in long-term Treasury bonds, plus US$1.1 trillion in MBS. All in all, over the past 18 years, the Federal Reserve has purchased more than $5 trillion in long-term Treasury bonds and $3 trillion in MBS through multiple rounds of QE. ## What are the risks of a puffy Fed?

Now in 2026, after 18 years of natural maturity and two rounds of balance sheet reduction, the Fed still holds 2.1 trillion in long-term U.S. debt and 2.1 trillion in MBS. These two parts of assets that "should not have existed" account for almost two-thirds of the Fed's total assets.

Asset duration has also been forced to increase from about 4 years before QE to about 8-9 years. What are the risks of such a cumbersome Federal Reserve? ## 1/Interest rate fluctuation-risk of asset loss: The duration of the Fed's assets reaches 8-9 years, which means that if interest rates rise by 1%, the Fed's assets will suffer a "book loss" of about 9%.

After the interest rate hike cycle in 2022-23, the Fed's floating losses have actually reached a level of about 1 trillion! Moreover, we have said that the Fed has greater control over short-term interest rates, while long-term interest rates almost need to be completely left to the market for valuation (the Fed becomes cumbersome once it becomes a buyer).

The rise in long-term interest rates is almost fatal to the Fed. Moreover, it currently seems that a rise in long-term interest rates on U.S. debt is inevitable in the future. Wash would be scared.

## 2/Losing the ability of “last purchaser”: The Federal Reserve is of course the "purchaser of last resort", and it is precisely because the Federal Reserve fulfilled its underpinning duties as the "purchaser of last resort" after 2008 that it was forced to "take over" a large number of long-term Treasury bonds from the U.S.

government and long-term assets of financial institutions, so that they would not collapse. If it does not lose weight, will such a cumbersome Fed be able to continue to fulfill its role as the "purchaser of last resort" when the next "possible crisis" comes? Can we continue to expand QE?

The answer is of course no; All financial institutions have gone out of business, and the Federal Reserve itself has become a commercial institution that underpins the assets of the entire society. No matter how much the U.S. government's deficit is, can it be thrown to the Federal Reserve in exchange for "Federal Reserve Notes" - U.S. dollars?

Doesn’t that mean unlimited money printing? If that day happens, it will be when the U.S. dollar system collapses. Please refer to the collapse of the Kuomintang’s gold yuan bond reform that year.

3/No longer has the ability to adjust interest rates: In the most realistic situation, due to the heavy holdings of the Federal Reserve's assets, the Fed's ability to adjust interest rates is also declining rapidly. How to understand this?

In the past, the Federal Reserve, which was very flexible, could adjust short-term interest rates only through short-term Treasury bond transactions in the secondary market. It could also occasionally influence long-term interest rates through the guidance of long-term Treasury bonds.

At that time, the Federal Reserve had both price tools (the ability to quote high and low prices independently) and quantitative tools (the ability to buy and sell independently). But where are the trillions of excess reserves currently placed? The Fed has almost no room for buying and selling in large quantities.

If it enters the market to buy and sell short-term government bonds, there will no longer be any "marginal leveraging effect". It is better for the Fed to pass the reserve ratio IORB and the overnight lending rate ON.

RRP carries out "interest rate price window adjustment", which means that currently the Fed only has price tools left, while the quantity tools have been marginally ineffective (it has already held too large a quantity). The Federal Reserve itself is one of the largest asset packages for short-term interest rates.

The Fed's lending, repurchase and reserve quotations are actually its actions to increase or reduce the cost of funds it pays, so it is equivalent to "quoting itself." ; As a single buyer in the transaction, this price is highly distorted.

For example, the current "interest rate hike" only increases the cost of funds paid by commercial banks to the Federal Reserve.

Commercial banks cannot withdraw the reserves stored in the Federal Reserve just because the "cost is high"; For commercial banks to transmit this chain of interest rate hikes down the chain, it is just that "funds are more expensive", rather than completely "tightening the amount of funds in the market", and the effect is limited.

As a result, the effect of the Fed's interest rate policy on the economic transmission of the whole society has also become lagging behind, and may be inconsistent with the direction of long-term interest rates in the short term, resulting in unclear signals.

Summary: That is, the cumbersome Fed not only faces the risk of damage to its own finances, but also only has the function of setting interest rate and price targets, and has almost lost its quantitative function. It has also lost the ability to efficiently transmit policy intentions by finely adjusting the quantity and price of liquidity.

Full text

# Fed 5: How did the Fed gain weight?

# Fed 5: How did the Fed gain weight? ## How did the Fed gain weight? Beginning in 2008, in response to the financial crisis and economic recession, the Federal Reserve launched multiple rounds of QE. What is quantitative easing? That is to directly purchase l

# Fed 5: How did the Fed gain weight? ## How did the Fed gain weight? Beginning in 2008, in response to the financial crisis and economic recession, the Federal Reserve launched multiple rounds of QE. What is quantitative easing? That is to directly purchase long-term assets on the market; which two long-term assets are the largest? MBS (mortgage-backed assets) from the real estate market and long-term Treasury bonds of the U.S. government. In the first round of QE (before 2010), the Fed bought 300 billion long-term U.S. bonds and 1.25 trillion MBS, directly injecting reserves, liquidity and cash into commercial banks, financial institutions and markets. After the first round of QE, it was still difficult to support the first wave of financial crisis and recession. The Federal Reserve launched the second round of QE. In the second round of QE (2011), it directly bought 600 billion in long-term US bonds. This car can't stop. In 2012, the Federal Reserve also launched a round of Operation Twist QT. What is "twist"? This distortion is really a distortion. The Federal Reserve should be short-term and avoid long-term, but in this round of QT, the Fed continued to maintain total assets unchanged. Sell short-term Treasury bonds and buy long-term Treasury bonds. If it doesn’t work after the second round, there will be a third round of QE (2012-2014) The Federal Reserve began regular monthly purchases of long-term Treasury bonds and MBS. In this round, it purchased a total of US$800 billion in US Treasuries and US$720 billion in MBS. Then there was QE during the epidemic. The Federal Reserve bought about US$2.2 trillion in long-term Treasury bonds, plus US$1.1 trillion in MBS. All in all, over the past 18 years, the Federal Reserve has purchased more than $5 trillion in long-term Treasury bonds and $3 trillion in MBS through multiple rounds of QE. ## What are the risks of a puffy Fed? Now in 2026, after 18 years of natural maturity and two rounds of balance sheet reduction, the Fed still holds 2.1 trillion in long-term U.S. debt and 2.1 trillion in MBS. These two parts of assets that "should not have existed" account for almost two-thirds of the Fed's total assets. Asset duration has also been forced to increase from about 4 years before QE to about 8-9 years. What are the risks of such a cumbersome Federal Reserve? ## 1/Interest rate fluctuation-risk of asset loss: The duration of the Fed's assets reaches 8-9 years, which means that if interest rates rise by 1%, the Fed's assets will suffer a "book loss" of about 9%. After the interest rate hike cycle in 2022-23, the Fed's floating losses have actually reached a level of about 1 trillion! Moreover, we have said that the Fed has greater control over short-term interest rates, while long-term interest rates almost need to be completely left to the market for valuation (the Fed becomes cumbersome once it becomes a buyer). The rise in long-term interest rates is almost fatal to the Fed. Moreover, it currently seems that a rise in long-term interest rates on U.S. debt is inevitable in the future. Wash would be scared. ## 2/Losing the ability of “last purchaser”: The Federal Reserve is of course the "purchaser of last resort", and it is precisely because the Federal Reserve fulfilled its underpinning duties as the "purchaser of last resort" after 2008 that it was forced to "take over" a large number of long-term Treasury bonds from the U.S. government and long-term assets of financial institutions, so that they would not collapse. If it does not lose weight, will such a cumbersome Fed be able to continue to fulfill its role as the "purchaser of last resort" when the next "possible crisis" comes? Can we continue to expand QE? The answer is of course no; All financial institutions have gone out of business, and the Federal Reserve itself has become a commercial institution that underpins the assets of the entire society. No matter how much the U.S. government's deficit is, can it be thrown to the Federal Reserve in exchange for "Federal Reserve Notes" - U.S. dollars? Doesn’t that mean unlimited money printing? If that day happens, it will be when the U.S. dollar system collapses. Please refer to the collapse of the Kuomintang’s gold yuan bond reform that year. 3/No longer has the ability to adjust interest rates: In the most realistic situation, due to the heavy holdings of the Federal Reserve's assets, the Fed's ability to adjust interest rates is also declining rapidly. How to understand this? In the past, the Federal Reserve, which was very flexible, could adjust short-term interest rates only through short-term Treasury bond transactions in the secondary market. It could also occasionally influence long-term interest rates through the guidance of long-term Treasury bonds. At that time, the Federal Reserve had both price tools (the ability to quote high and low prices independently) and quantitative tools (the ability to buy and sell independently). But where are the trillions of excess reserves currently placed? The Fed has almost no room for buying and selling in large quantities. If it enters the market to buy and sell short-term government bonds, there will no longer be any "marginal leveraging effect". It is better for the Fed to pass the reserve ratio IORB and the overnight lending rate ON. RRP carries out "interest rate price window adjustment", which means that currently the Fed only has price tools left, while the quantity tools have been marginally ineffective (it has already held too large a quantity). The Federal Reserve itself is one of the largest asset packages for short-term interest rates. The Fed's lending, repurchase and reserve quotations are actually its actions to increase or reduce the cost of funds it pays, so it is equivalent to "quoting itself." ; As a single buyer in the transaction, this price is highly distorted. For example, the current "interest rate hike" only increases the cost of funds paid by commercial banks to the Federal Reserve. Commercial banks cannot withdraw the reserves stored in the Federal Reserve just because the "cost is high"; For commercial banks to transmit this chain of interest rate hikes down the chain, it is just that "funds are more expensive", rather than completely "tightening the amount of funds in the market", and the effect is limited. As a result, the effect of the Fed's interest rate policy on the economic transmission of the whole society has also become lagging behind, and may be inconsistent with the direction of long-term interest rates in the short term, resulting in unclear signals. Summary: That is, the cumbersome Fed not only faces the risk of damage to its own finances, but also only has the function of setting interest rate and price targets, and has almost lost its quantitative function. It has also lost the ability to efficiently transmit policy intentions by finely adjusting the quantity and price of liquidity.

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