The Federal Reserve is using hedges to finance its bond purchases in a way that gives the Federal Government little incentive to do the same, a new analysis has found.
The report by the nonpartisan Congressional Research Service found that while the Federal government could offset its borrowing costs with Treasury debt and other assets, it would still need to raise taxes to finance these purchases.
The authors of the report, which was released on Tuesday, said the Fed’s efforts to purchase $3.6 trillion of bonds in the next three years would likely require raising taxes by an average of about 4.8 percentage points, a number that is about twice the amount of revenue the Treasury is expected to collect over the same period.
The Fed would need to increase its federal debt by $4.5 trillion to cover the cost of its bond buying operations, and it would have to increase taxes by about 4 percentage points to fund it.
The study also found that Treasury’s current borrowing authority of $15.2 trillion is far less than what is needed to cover bond purchases.
The Treasury has an interest rate of 1.8 percent and a reserve ratio of 0.7 percent, the authors said.
The Federal Reserve has a balance sheet of $2.5trillion, and the authors estimate that the Fed is not using its balance sheet to finance all its bond-buying commitments.
In addition, the report found that the federal government is not in a position to use its balance sheets to finance large bond purchases, as it would require increasing taxes to fund them.
The authors said this would be difficult because most of the money raised would go to pay for the Treasury’s spending commitments.
The Treasury is spending money to fund the programs in the report that are considered “non-budgetary” and therefore exempt from the law’s strict spending caps, such as the National Institutes of Health and the Centers for Medicare and Medicaid Services.