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« Recession Watch: Dr. John Rutledge and the Best Metric | Main | Recession Watch: Heads Up on ISM »

September 29, 2006


Nima Mahdjour

Hi Jeff,

thanks for the reply. But I feel like my main point is still unanswered. In your post you were saying that the FED's policy does not have a direct impact on the long term interest rates for treasury bonds (the long end of the yield curve). But if the federal reserve has printed money and used that money to purchase $156 billion in long term treasury bonds, this activity must have exercised an upward pressure on the price for each one of those bond contracts and hence lowered the interest rate for them. To be more precise, per additional bond contract purchased by the FOMC, the interest rate for the next available bidder must have dropped below a level that it would have been at, had the FOMC not made the purchase.

The decision to buy those bonds must have been made by the FOMC, so why should it be out of its control?

Thanks in advance,


Thanks for your question, Nima.

The Treasury and the Fed operate independently and with different missions. The Treasury has to fund government spending, so their effect is limited to choosing duration of the issued debt. You are correct in saying that this has an effect, but it is not something under the Fed's control.

Fed decisions impact longer-term debt through inflation expectations, and perhaps through expectations for future short-term interest rate changes.

Their influence is therefore indirect.

Thanks again,


Nima Mahdjour

I have a question:

Why are you saying that the FOMC does not control the long end of the curve?

The Federal Reserve's balance sheet ( shows that about $229 billion are held in Treasury securities that are due within the next 1-5 years and a significant amount of $156 billion are invested in securities that fall due within the next 5- over 10 years.

Based on this I draw the conclusion that the FED has a significant control over the whole spectrum of the curve.

I would like to know why you think it does not.

Kind regards,

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