Fed’s Cut in Bond Holdings May Be Messier Than Yellen Hopes

... some Fed watchers argue that the Treasury Department will have a greater say than the Fed in determining the impact of a reduction in the central bank’s $2.5 trillion portfolio of U.S. government securities.

If the government issues more bills, it would effectively be a “freebie” for the financial markets and the economy, according to Lou Crandall, chief economist at Wrightson ICAP LLC. Short-term interest rates would remain anchored by the Fed and so wouldn’t be much affected by the added supply of bills.

But if the Treasury opts to issue more longer-dated securities instead, that would put upward pressure on Treasury and corporate bond yields and mortgage rates, with implications for the housing market and the broader economy.